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HM Revenue and Customs Brief 32/08

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HM Revenue and Customs -Tax Authorities

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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.

Background

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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© Crown Copyright 2008.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2008-07-21 13:32:07 in Tax Articles

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