HM Revenue and Customs Brief 32/08
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Issued 9 July 2008
Capital Gains Tax and Income Tax: former shareholders in Northern Rock plc
and members of employee share schemes
1. This Revenue and Customs Brief sets out our understanding of the
consequences of the transfer of Northern Rock plc into temporary public
ownership in relation to the capital gains tax position of former shareholders
in Northern Rock plc, and the income tax and capital gains tax position of those
who held shares and share options under employee share schemes.
2. Sections 3 and 4 of The Banking (Special Provisions) Act 2008 ('the Act')
give powers for the Treasury to order the transfer of securities issued by an
authorised UK deposit-taker and powers for extinguishing rights to subscribe
for, or otherwise acquire, securities of the deposit-taker in question. The Act
received Royal Assent on 21 February 2008.
3. The powers in sections 3 and 4 of the Act were exercised in the Northern
Rock plc Transfer Order 2008 [Statutory Instrument 2008 No.432]. The Transfer
Order was made on 21 February 2008 and came into force on 22 February.
4. Under Article 2 of the Transfer Order shares in Northern Rock plc were
transferred to the Treasury. The shares in question are the ordinary shares,
foundation shares and preference shares issued by the company.
5. Under Article 4 of the Transfer Order rights (or other entitlement) to
receive shares in the company (whether by subscription, conversion or otherwise)
were extinguished. The rights which are extinguished include rights granted by
reason of, or in connection with, a person’s office or employment with Northern
Rock plc or any of its group undertakings.
6. In accordance with section 5 of the Act the Treasury has also made an
order for a scheme for compensation for the transfer of shares and extinguishing
of rights to receive shares. The Northern Rock plc Compensation Scheme Order
2008 [Statutory Instrument 2008 No.718] was made on 12 March 2008 and came into
force on 13 March. The Treasury is inviting applications for the position of
independent valuer to assess any compensation that may be payable as a result of
the transfer of shares in Northern Rock plc to the Treasury. The valuer will
start work later in the year. It is not possible to say at this stage when the
valuer will complete his or her work.
Capital Gains Tax (CGT)
7. We consider that the entire loss to the shareholder of his or her shares
under the Transfer Order is an occasion of disposal under section 24(1) of the
Taxation of Chargeable Gains Act 1992 (TCGA). The time of the disposal will be
22 February 2008, the date the Transfer Order came into force, which falls in
the tax year 2007-08.
8. As no consideration was received for the shares, the disposal on 22
February will normally give rise to a loss in respect of any allowable costs of
acquisition, but shareholders who are entitled to receive a payment under the
Compensation Scheme Order should refer to paragraph 10 below. Where the disposal
includes 'free' shares received by the same holder when Northern Rock
demutualised in 1997, those shares will not have any cost for capital gains
purposes. Further information on the tax treatment of free shares is contained
in Inland Revenue Tax Bulletin 34.
9. Losses arising under section 24(1) TCGA can be set against chargeable
gains in the usual way. The latest date for claiming losses arising in 2007-08
is 31 January 2014.
10. Any payment under the Compensation Scheme Order will be chargeable to CGT
under section 22(1)(a) TCGA as a capital sum derived from the recipient's former
shareholding. The charge to CGT will arise in the tax year in which the
compensation is received. Where a former shareholder has not claimed a capital
loss under section 24(1) TCGA, see paragraphs 7 to 9 above, any allowable costs
incurred in acquiring the shares may be deducted from the compensation in
arriving at the gain arising under section 22(1)(a) TCGA.
Employee share schemes
11. For shares and share options held by employees under employee share
schemes, there may be income tax consequences.
Tax advantaged schemes
Save As You Earn
12. Employees with a savings contract under the Save As You Earn (SAYE)
scheme, also known as ‘Sharesave’, may choose to continue paying monthly
contributions into their savings scheme. When the three year or five year
contract expires, they can receive their savings with a tax-free bonus. They
will no longer have an opportunity to exercise an option and buy shares at the
end of the contract.
13. As a separate matter, if any compensation is received from the Government
for extinguishing of rights to receive shares (see paragraph 6 above), the
compensation is likely to be the receipt of a benefit in connection with the
SAYE options, so the amount of the benefit will count as employment income under
section 477 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) in the tax year
in which the compensation is received.
Share Incentive Plan
14. Any shares held in a Share Incentive Plan (SIP) were transferred into
public ownership on 22 February under the Transfer Order. A loss will arise for
capital gains tax purposes, as explained in paragraph 7 above.
15. Any compensation received from the Government will be chargeable to
capital gains tax for the tax year in which it is received, as explained in
paragraph 10 above.
Company Share Option Plan
16. It will no longer be possible to exercise any options acquired under a
Company Share Option Plan (CSOP) and receive shares in Northern Rock. If any
compensation is received from the Government for extinguishing of rights to
receive shares (see paragraph 6 above), this compensation is likely to be the
receipt of a benefit in connection with the CSOP options, so the amount of the
benefit will count as employment income under section 477 ITEPA in the tax year
in which the compensation is received.
Non tax advantaged schemes
Restricted shares within Chapter 2 ITEPA
17. As no consideration was received when shares were taken into public
ownership on 22 February 2008, there is no 'chargeable event' under section
427(3) ITEPA and therefore no charge to income tax in 2007-08.
As no consideration was received for the shares, for capital gains purposes
the disposal on 22 February will normally give rise to a loss in respect of any
allowable costs of acquisition, but shareholders who are entitled to receive a
payment under the Compensation Scheme Order should refer to paragraph 10 below.
Compensation received in connection with employment-related securities
18. Any compensation received from the Government in connection with
employment-related securities is likely to be the receipt of a benefit in
connection with those employment-related securities. The amount of the benefit,
to be determined on the facts of each case, will count as employment income
under section 447 ITEPA in the tax year in which the compensation is received.
Operation of PAYE
19. Since Northern Rock shares were not tradeable immediately before they
were disposed of in February 2008, we consider they are not Readily Convertible
Assets (RCA) under section 702(1)(a) ITEPA. Furthermore, they would have been
'corporation tax deductible' under Schedule 23 Finance Act 2003, and are
therefore not treated as RCA by Section 702(5A) ITEPA. Therefore, PAYE will not
be operable and the employment income should be returned by the employee via the
Self Assessment process.
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Article Published/Sorted/Amended on Scopulus 2008-07-21 13:32:07 in Tax Articles