Revenue Note for Guidance

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Revenue Note for Guidance

CHAPTER 4

Approved Share Option Schemes

Overview

Chapter 4 of Part 17 relates to Revenue approved share option schemes under which employees are given options to purchase shares in their employer company at a predetermined price and can make a gain where they purchase shares that have increased in value since the option was granted.

519D Approved share option schemes

Summary

Up to 24 November 2010 (date of publication of National Recovery Plan), this section provided for tax relief in respect of share options granted to employees under schemes approved by the Revenue Commissioners. The approval of such schemes and the conditions which must have been satisfied before such approval could be given are set out in Schedule 12C. Under an approved share option scheme the normal charge to income tax at the date of exercise of the option did not apply and, instead, the employee was chargeable to capital gains tax on the full gain (i.e. the difference between the amount paid for the shares and the amount received) on a disposal of the shares. To qualify for this favourable treatment a period of at least 3 years must have elapsed between the date of the grant of the option and the date of any subsequent sale of the shares. All gains arising, or options to acquire shares received, on or after 24 November 2010 are chargeable to income tax regardless of whether a scheme received Revenue approval, or that options to acquire shares were received, before that date.

Options that had been granted before the scheme was approved by the Revenue Commissioners also qualified for the relief provided the scheme was approved before 31 December 2001 and that at the time of the grant and exercise (if prior to approval) the scheme would have been capable of being approved had the legislation been in force at those dates.

Details

(1) The provisions of this section will apply where an individual obtains an option to acquire shares in a company—

  1. by virtue of an employment or directorship in that company, or another company, and
  2. the individual obtains the option to acquire shares under a share option scheme approved under Schedule 12C and which approval has not been withdrawn.

(2) Tax will not be chargeable, under any provision of the Tax Acts, in respect of the receipt of an option referred to in subsection (1). Previously, such a charge could have arisen in certain circumstances i.e. where the option received is not exercisable for at least 7 years. This is subject to subsection (8) which disapplies this tax exemption in respect of options that are received on or after 24 November 2010.

(3) Subject to subsection (4), where an individual exercises the option granted under the terms of an approved scheme at a time when the scheme is approved, tax will not be chargeable under the provisions of the Tax Acts in respect of any gain realised on the exercise of the option. In these circumstances, the base cost for capital gains tax will be the acquisition cost rather than the market value at date of acquisition. This is subject to subsection (9) which disapplies this tax exemption in respect of any gain realised on or after 24 November 2010.

(4) A condition is imposed that the exemption granted on the exercise of the option, as set out in subsection (3), does not apply in the case where shares, acquired by the exercise of an option, or shares which are exchanged for those shares in a take-over, are disposed of by the individual within a period of 3 years of the date of the grant of the option.

(5)(a) Where a company uses “a relevant body” (i.e. a dedicated trust or subsidiary company) to acquire and hold the “scheme shares” (for example, existing shares which the company cannot legally buy itself) that trust or company will not be liable to capital gains tax on any disposal of such shares to the employees under the terms of the scheme. Arising from this, the “base cost” to the employees for capital gains tax purposes of the scheme shares is set at the price actually paid for them – the same as would be the case if the employee acquired the shares directly from the company. Without this provision, the insertion of trust/subsidiary company between the employer company and the employee would result in the employee being able to use the possibly higher market value as his or her base cost. In addition, the company is not entitled to a corporation tax deduction in respect of any expenses (e.g. discounts on shares) incurred by it in enabling the trust/subsidiary company to acquire scheme shares. Both these conditions are to ensure that both the employee and the company are in exactly the same position as they would have been had the trust / subsidiary company not been used.

(5)(b) The terms “relevant body” and “scheme shares” are defined for the purposes of subsections (5) and (6).

(6)(a) & (b) Where a company incurs costs in establishing a share option scheme approved by the Revenue Commissioners in accordance with Schedule 12C and, subject to subsection (7), under which no employee or director has obtained options prior to such approval, such costs are allowable as a deduction in computing the profits or gains of a trade carried on by a company, or where incurred by a management or assurance company, may be added to its management expenses for the purposes of computing the company’s profits for corporation tax purposes.

(6)(c) No deduction is available under any provision of the Tax Acts (including this provision) for expenses incurred in enabling a relevant body to acquire scheme shares.

(6)(d) If approval is given for the share option scheme later than 9 months after the end of the accounting period in which the sum was expended, then the sum is treated as being expended in the accounting period in which the approval is given and not in the period in which it is expended.

(7)(a) Where a share option scheme is approved and, prior to such approval, an individual obtained an option under the scheme which meets the conditions of paragraph (b) of this subsection then that option will be treated as an option obtained under an approved scheme.

(7)(b) The conditions referred to are that:

  1. the option was exercised on or after 15 February 2001, and
  2. the scheme was approved on or before 31 December 2001, and at the time the option was obtained or exercised (if exercise occurred before the date of approval), that the scheme would have been approved under Schedule 12C if that Schedule had been in place at the time the option was obtained.

(8) The tax exemption given by subsection (2) does not apply in respect of rights to acquire shares where such rights are received on or after 24 November 2010.

(9) The tax exemption given by subsection (3) does not apply in respect of any gain realised by the exercise of an option on or after 24 November 2010.

Relevant Date: Finance Act 2020