128A Deferral of payment of tax under section 128

Summary

This section provides that where a person has exercised a right to acquire shares and is chargeable to income tax in accordance with section 128(2) the payment of the tax which has become due may, as discussed below, be deferred at the election of the individual. Where the option is exercised on or after 6 April 2000 and on or before 28 March 2003, payment of the tax may be deferred until the earlier of —

• the year of assessment in which the shares, acquired by the exercise of the right, are disposed of, or
• the year of assessment which is 7 years after the year of assessment in which the exercise took place.

In the case of share options exercised before 6 February 2003, payment of the income tax liability due can, irrespective of whether there has been an election for deferral as referred to above, be satisfied by way of a payment on account equal to the market value of the shares at the relevant date specified in the section with the balance of tax further deferred, if necessary, until there is a subsequent disposal of shares by the person or the person’s spouse or civil partner.

In all cases the balance of the income tax due after the payment on account will become due for payment by reference to the net gains, after tax, made by the taxpayer, or his or her spouse or civil partner, on any subsequent disposal of shares. In the circumstances where a taxpayer dies before the tax has been fully discharged the balance remaining will not be levied on the estate.

Where a taxpayer defaults on his or her obligations under this new regime then any outstanding income tax will revert to being payable by reference to the normal due dates. Where the balance of income tax due is being deferred, by reference to the reduced market value of the shares, any capital gains tax loss arising (being the difference between the market value of the shares at date of acquisition and at date of disposal) may not be used until the full income tax liability is met.

Details

Period to which deferral of tax applies

(1) Subject to subsection (2), where a right to acquire shares is exercised in the period from 6 April 2000 to the date of passing of the Finance Act 2003 (28 March 2003) which results in an amount chargeable under Schedule E by virtue of section 128, which is payable to the Collector-General, the person concerned may elect that the tax will be payable in accordance with the provisions of subsection (4).

Disposals in year of exercise of right

(2) Subsection (1) does not apply if the disposal of the shares takes place in the same tax year as the right to acquire those shares was exercised. In these circumstances no deferral of the tax is possible.

Election for deferral of tax

(3) The election to defer payment of the tax, referred to in subsection (1) must be made in writing to the inspector not later than 31 October following the year of assessment in which the right to acquire shares was exercised. This date ties in with the return filing dates for that year of assessment under the rules of Self Assessment (see Part 41A).

Period to which deferral applies

(4) The tax due may be deferred until the earlier of the following:

1. 31 October following the year of assessment in which the shares are disposed of, or
2. 31 October following the year of assessment beginning 7 years after the rights to acquire the shares were exercised.

These dates tie in with the preliminary tax payment dates for capital gains tax. Because it is possible that there may also be capital gains tax due arising from the disposal of the shares (based on the difference between market value of the shares on the date of exercise of the right or option and the disposal proceeds) it means that payment of both the income tax and capital gains tax due, can be made on the same day.

Payment on account provisions

(4A) The situation where the market value of shares acquired under an unapproved share option scheme declines between the date of exercise of the option and a specified date so that the market value at that date is less than the liability arising under section 128 on the exercise of the option is addressed. In that situation, and notwithstanding subsection (4), a payment on account (inclusive of any payments already made) equal to that market value may be made to the Collector-General with the balance of the liability deferred further until there is a disposal of any shares by either the person chargeable or his or her spouse. The relevant dates for determination of market value and making of payments are:

• (4A)(c) 6 February 2003, or date of disposal if later, for persons with unpaid liabilities due before or by 6 February 2003, who have not elected for the 7 year deferral and who are not entitled to make that election after 6 February 2003 – in these cases the payment on account will be due on or before 30 June 2003;
• (4A)(a)(i) date of disposal in the case of persons who elect for the 7 year deferral and then dispose of shares within that period – in these cases the payment on account will be due 30 days after the date of disposal or, if later, by 30 June 2003;
• (4A)(a)(ii) 31 December at the end of the 7 year deferral period for those who elect to defer and then retain ownership of their shares for the 7 year period – in these cases the payment on account will be due by 30 days after the end of the deferral period, and
• (4A)(b) 31 October 2003 or 2004, where the taxpayer is currently entitled to elect for the 7 year deferral before on of those dates but does not do so or where the tax is only due to be paid by one of those dates – in these cases the payment on account will be due by 30 November 2003 or 2004. Where there is a disposal of the option shares before the relevant October date in these cases, the payment on account will be equal to the sales proceeds.

Payment of balance of unpaid tax on subsequent disposal

(4A)(d)(i) The amount of tax deferred for payment will be due by reference to the disposals, in a year of assessment, of any shares by the taxpayer or his or her spouse or civil partner.

The amount to be paid will be the lesser of —

• the aggregate outstanding balances of tax unpaid, and
• the total of any net gains from disposals of shares in the year of assessment in question, or, in the case of disposals on or after 1 January 2012, half of such net gains.

The due date for the payment of this amount is on or before 31 October in the year following the year of assessment in which the disposal(s) of the shares took place.

(4A)(d)(ii) “Net gain” in relation to the disposal of shares is the market value of the shares at the date of disposal less so much of the sum of—

• any consideration paid for the shares,
• where the concessionary treatment under this subsection does not apply the amount of the income tax chargeable, or
• where the concessionary treatment does apply, the total income tax paid before disposal, and
• the capital gains tax chargeable

that is not greater than the market value.

The income tax chargeable in respect of the acquisition of shares or the capital gains tax chargeable in respect of the disposal of shares is the amount by which the income tax or capital gains tax chargeable on the individual would have been reduced if the acquisition or disposal of the shares had not happened.

Election

(4A)(e) A taxpayer, who wishes to avail of the provisions of this subsection must make a written election to the inspector, on or before 1 June 2003, in a form prescribed by Revenue, and give specified details relating to the exercise of the share option and the shares acquired.

There is provision for the admission of a late election in circumstances where the inspector or other authorised officer is satisfied that the late election was due to absence, illness or other reasonable cause.

Failure to comply with provisions

(4A)(f) Where an individual, having elected to avail of the provisions of this subsection, fails at any time to comply fully with its provisions, the liability under section 128 will be due and payable as if this subsection had not been enacted.

Treatment on death of individual

(4A)(g) In the event of the death of the chargeable person, the balance of any outstanding liability under section 128 and payable under subsection (4) or this subsection, will be discharged by the Revenue Commissioners, (and will not be a charge on the estate of the deceased person).

Bar on repayments

(4A)(h) The concessionary treatment to be accorded under this subsection will not result in repayments of income tax (chargeable on gains from the exercise of share options) paid before 6 February 2003.

Disposal of shares by spouse or civil partner

(4A)(i) The reference in paragraph (d) to the disposal of shares includes disposals by the spouse or civil partner of the person chargeable:

• in cases of jointly assessed married couples or jointly assessed civil partners,
• in the case of spouses or civil partners who are not jointly assessed, but the disposal by the spouse follows a transfer – on or after 25 February 2003 – of the shares from the other spouse or the other civil partner. An exception to this latter rule is where the couple are legally separated or divorced or where the civil partnership has been dissolved.

Excluded categories of persons

(4A)(j) The concessionary treatment under this subsection will not be granted to a person who has not paid (or agreed to pay) tax chargeable under section 128 in respect of share option gains that do not come within the scope of the concessionary treatment.

Definitions

(4A)(k) “Market value” means the price an asset might reasonably be expected to fetch on a sale in the open market. “Shares” means securities within the meaning of section 135 and stock.

Use of Capital Gains Tax loss relief

(4B) Where subsection (4A) applies in relation to any shares, any capital gains tax loss arising on a disposal of the shares is frozen until such time as the income tax payable in respect of the acquisition of the shares is fully paid.

Part disposal rules

(5) Provision is made for circumstances where a partial disposal of shares takes place. If, say, half of the shares are disposed of in any year, then only half of the deferred charge becomes due for payment. It also envisages events such as rights or bonus issue of stock or stock splits and ensures that by applying a just and reasonable basis for apportionment, that the appropriate amount of tax will be paid.

Determination of tax to be deferred

(6) Where an election to defer the tax charge is made and subject to other similar provisions in the Tax Acts, the gain realised is to be regarded as the last part of that person’s income. This means that the tax is calculated at the person’s marginal rate of tax and that is the amount of tax which is deferred.

Due dates for interest

(7) The due date for payment of tax which has been deferred, for the purposes of section 1080, is set as the date when the tax becomes due and payable under subsections (4) and (4A). This means that the interest provisions in section 1080 will apply from that date. Subsection (4A) has no effect as respects the payment of tax due from gains from options exercised on or after 6 February 2003.

Relevant Date: Finance Act 2024