515 Excess or unauthorised shares

Summary

This section is concerned with the situation where the total of the initial market values of all shares allocated to an individual in any one year of assessment (whether under a single approved scheme or under 2 or more such schemes) exceeds the €12,700 limit or the €38,100 limit, whichever is applicable, or where shares are allocated to an individual at a time when he/she is ineligible to participate in the scheme. Those shares which cause the limit to be exceeded are described as “excess shares”. Shares allocated to an ineligible person are described as “unauthorised shares”.

Excess or unauthorised shares receive special tax treatment. First, the locked-in value of such shares at any time (for example, when they are disposed of) is their market value at that time. The initial market value and the effect of any capital receipts which are normally deductible under section 512(1)) in computing locked-in value are disregarded. Secondly, the appropriate percentage is always 100 per cent. The effect of this is that when excess or unauthorised shares are sold, the whole of the proceeds of sale or the market values of the shares (if it is not arm’s length sale) are chargeable to income tax at the time of the disposal. Excess or unauthorised shares still held by the trustees at the earlier of the release date or the date of the participant’s death, are treated as having been disposed of, immediately before that date, at their market value at that time.

Details

Excess shares

(1) This section applies where the total market values of all the shares allocated to a participant in any one year of assessment (whether under a single approved scheme or under 2 or more such schemes) exceeds €12,700 or €38,100 where the conditions in subsection (2A) are satisfied.

(2A) The conditions referred to in subsection (1) are as follows:

• shares allocated to an individual have been transferred to the trustees of the approved scheme by the trustees of an employee share ownership trust (ESOT) to which section 519 applies,
• at the time of transfer a period of at least 10 years, or such lesser period as the Revenue Commissioners may allow (not being less than the period referred to in the following condition) commencing with the date the ESOT was established and ending at the time when all pledged shares became unpledged (“the encumbered period”) has elapsed,
• at all times in the 5 years since the ESOT was established or such shorter period as the Minister may allow, 50 per cent of the securities, or such lesser amount as the Minister may allow, held by the trustees at the time were pledged as security for borrowings,
• none of the shares pledged at any time since the ESOT was established have been transferred from the trustees of the ESOT to the trustees of the approved scheme because they have been pledged for the period of 10 years (or such lesser period allowed by the Revenue Commissioners) or more referred to above.

(2B) The €38,100 limit may only be applied in the first year of assessment during which “the encumbered period” has elapsed and then only in respect of shares allocated after the encumbered period has elapsed.

(2) Where for any year of assessment a participant in a scheme is allocated shares in 2 or more schemes, at the same time, and the €12,700 limit or the €38,100 limit, whichever is applicable, is exceeded, then, the same proportion of shares allocated under each scheme is to be regarded as excess. For capital reorganisations, the rule is that a “new share” is to be treated as excess or unauthorised if the “corresponding” share was so treated.

Unauthorised shares

(3) Unauthorised shares are shares allocated to an individual at a time when he/she was ineligible to participate in an approved scheme by virtue of Part 4 of Schedule 11 (which sets out the individuals ineligible to participate).

Treatment of excess and unauthorised shares

(4) In the case of excess or unauthorised shares the appropriate percentage for the purpose of charging an individual to income tax under Schedule E is always 100 per cent. In addition, when a person who has been allocated excess or unauthorised shares disposes of shares, he/she is treated as disposing of shares which are not excess or unauthorised shares before shares which are. This is subject to the first-in-first-out identification rule in section 512(6) and, by virtue of section 509(2), overrides any direction given to the trustees by a participant.

(5) Excess or unauthorised shares still held by trustees at the earlier of the release date or the date of the participant’s death are treated as having been disposed of, immediately before that date, at their market value at that time.

Locked-in value

(6) The locked-in value at any time of excess or unauthorised shares is to be their market value at that time.

Company reconstruction

(7) Where there has been a company reconstruction to which section 514 applies, a “new share” is to be treated as excess or unauthorised if the “corresponding” share was so treated.

(8) Any order made by the Minister to reduce the time period or percentage referred to in subsection (2A)(b) requires a prior resolution to that effect to be passed by Dáil Éireann.

Relevant Date: Finance Act 2021