Revenue Note for Guidance

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Revenue Note for Guidance

510 Approved profit sharing schemes: appropriated shares

Summary

Where the trustees of an approved scheme have acquired shares and allocated them to a participant a charge to income tax does not arise on the participant in respect of the right to receive the beneficial interest in those shares by virtue of such an allocation.

Details

Interpretation

(1) The references to an approved scheme are references to a scheme approved in accordance with Part 2 of Schedule 11. A reference to a participant is taken as a reference to an individual to whom the trustees of an approved scheme have allocated shares. Subject to section 514 (company reconstructions, amalgamations, etc), any reference to a participant’s shares is construed as a reference to the shares which have been allocated to him/her by the trustees of an approved scheme.

(2) The initial market value of a share is the market value of the share at the date of allocation to a participant or at an earlier date or dates agreed with the Revenue Commissioners. That market value is determined in the same way as for capital gains tax, namely, the price the share might reasonably be expected to fetch on a sale in the open market without taking into account any of the contractual obligations imposed personally on a participant by section 511(4).

Application

(3) This section applies where the trustees of an approved scheme allocate shares which they have previously acquired and which meet the conditions in Part 3 of Schedule 11 to a participant in the scheme.

Exemption from income tax

(4) Where shares are allocated to a participant by the trustees under an approved scheme, a charge to income tax is not made on that participant in respect of the right to receive the beneficial interest passing to him/her by virtue of such allocation.

Capital gains tax

(5) For capital gains tax purposes, a participant is treated from the date of allocation as absolutely entitled to his/her shares as against the trustees. This means that, from the moment of allocation, any liability to capital gains tax is on the participant and the ending of the retention period does not constitute an occasion for a charge to capital gains tax on the trustees as would otherwise be the case.

(5A) If shares are allocated to a participant by the trustees under an approved scheme —

  • where those shares were previously transferred to such trustees by the trustees of an employee share ownership trust (ESOT) to which section 519 applies, and
  • where the shares were transferred at a date later than that on which the shares could have first been transferred in accordance with the terms of the employee share ownership trust deed or any other document but, regardless of the reason, were not transferred on that earlier date,

then, for capital gains tax purposes, the allocation to the participant concerned shall be deemed to have taken place on the day following the day when those shares could have first been transferred out of the ESOT to the trustees of the approved scheme.

(6)(b) The trustees are exempt from capital gains tax on any gains arising at the time when shares are allocated to a participant provided the shares are allocated to the participants within 18 months of acquisition.

For the purpose of determining whether shares are allocated within the 18 months period, the “first-in-first-out” rule applies.

Surcharge on undistributed income of trust

(6)(a) Where the trustees of an approved scheme acquire shares and within a period of 18 months after their acquisition, the shares are allocated in accordance with the scheme, any dividends on the shares received by the trustees are not liable to the income tax surcharge of 20 per cent on the undistributed income of certain trusts provided for in section 805. It should be noted that the income referred to is income of the profit sharing trust received by the trust before the allocation of the shares to participants and not income received by the trust on behalf of participants. The latter income is to be charged to tax in the hands of participants in the ordinary way.

For the purpose of determining whether shares are allocated within the 18 months period, the “first-in-first-out” rule applies.

Information

(7) The Revenue Commissioners may request information by notice in writing within such time as they may direct (but not being less than 30 days). The information may, in particular, relate to the giving or withdrawal of approval and the determination of any participant’s tax liabilities. The circumstances in which approval may be withdrawn are set out in paragraph 5(1) of Schedule 11.

(8) With effect from 2009 onwards the trustees of an approved profit sharing scheme are obliged to automatically furnish the same information referred to in the paragraph above to the Revenue Commissioners in respect of each calendar year. This return of information is required by 31 March in the year following the year in question. Failure to do so will result in penalties as set out in sections 1052 and 1054, as appropriate.

Relevant Date: Finance Act 2020