Finance Act, 1986

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Tax treatment of directors of companies and employees granted rights to acquire shares or other assets.

9.—(1) (a) In this section, save where the context otherwise requires—

“company” has the meaning assigned to it by section 1 of the Corporation Tax Act, 1976 ;

“director” and “employee” have the meanings respectively assigned to them by section 13 (1) of the Finance Act, 1972 ;

“right” means a right to acquire any asset or assets including shares in any company;

“market value” shall be construed in accordance with section 49 of the Capital Gains Tax Act, 1975 ;

“shares” includes securities (within the meaning of Part IX of the Corporation Tax Act, 1976 ) and stock.

(b) In this section—

(i) references to the release of a right include references to agreeing to the restriction of the exercise of the right;

(ii) any question whether a person is connected with another shall be determined in accordance with the provisions of section 157 of the Corporation Tax Act, 1976 ;

(iii) a person shall be regarded as acquiring a right as a director of a company or as an employee—

(I) if by reason of his office or employment it is granted to him, or to another person who assigns the right to him, and

(II) if section 76 (3) of the Income Tax Act, 1967 , does not apply in charging to tax the profits or gains of that office or employment,

and clauses (I) and (II) shall apply to a right granted by reason of a person's office or employment before he has commenced to hold it or after he has ceased to hold it as they would apply if he had commenced to hold the office or employment or had not ceased to hold the office or employment, as the case may be.

(2) Where a person realises a gain by the exercise of, or by the assignment or release of, a right obtained by that person on or after the 6th day of April, 1986, as a director of a company or employee, he shall be chargeable to tax under Schedule E for the year of assessment in which the gain is so realised on an amount equal to the amount of his gain, as computed in accordance with this section.

(3) Subject to subsection (5), where tax may by virtue of this section become chargeable in respect of any gain which may be realised by the exercise of a right, tax shall not be chargeable under any other provision of the Tax Acts in respect of the receipt of the right.

(4) The gain realised by—

(a) the exercise of any right at any time shall be taken to be the difference between the market value of the asset or assets, as the case may be, at the time of acquisition and the aggregate amount or value of the consideration, if any, given for the asset or assets and for the grant of the right, and

(b) the assignment or release of any right shall be taken to be the difference between the amount or value of the consideration for the assignment or release and the amount or value of the consideration, if any, given for the grant of the right,

and for this purpose the inspector may make a just apportionment of any entire consideration given for the grant of the right or for the grant of the right and for something besides:

Provided that neither the consideration given for the grant of the right nor any such entire consideration shall be taken to include the performance of any duties in or in connection with an office or employment, and no part of the amount or value of the consideration given for the grant shall be deducted more than once under this subsection.

(5) (a) Where such a right as is mentioned in subsection (2) is obtained as mentioned therein, and the right is capable of being exercised later than seven years after it is obtained, subsection (3) shall not prevent the charging of tax under any other provisions of the Tax Acts in respect of the receipt of the right; but where tax is charged under any of those provisions it shall be deducted from any tax which, under subsection (2), is chargeable by reference to the gain realised by the exercise, assignment or release of the right.

(b) For the purpose of any charge to tax enabled to be made by this subsection, the value of a right shall be taken to be not less than the market value at the time the right is obtained of the asset or assets which may be acquired by the exercise of the right or of any asset or assets for which the asset or assets so acquired may be exchanged, reduced by the amount or value (or, if variable, the least amount or value) of the consideration for which the asset or assets may be so acquired.

(6) Subject to subsection (7), a person shall, in the case of a right granted by reason of his office or employment, be chargeable to tax under this section in respect of a gain realised by another person—

(a) if the right was granted to that other person, or

(b) if the other person acquired the right otherwise than by or under an assignment made by way of a bargain at arm's length, or if the two are connected persons at the time when the gain is realised,

but in a case within paragraph (b) the gain realised shall be treated as reduced by the amount of any gain realised by a previous holder on an assignment of the right.

(7) A person shall not be chargeable to tax by virtue of subsection (6) (b) in respect of any gain realised by another person if the first-mentioned person was divested of the right by operation of law on his bankruptcy or otherwise, but the other person shall be chargeable to tax in respect of the gain under Case IV of Schedule D.

(8) If a right is assigned or released in whole or in part for a consideration which consists of or comprises another right, that other right shall not be treated as consideration for the assignment or release, but this section shall apply in relation to it as it applies in relation to the right assigned or released and as if the consideration for its acquisition did not include the value of the right assigned or released but did include the amount or value of the consideration given for the grant of the right assigned or released so far as that has not been offset by any valuable consideration for the assignment or release other than the consideration consisting of the other right.

(9) (a) If as a result of two or more transactions a person ceases to hold a right and he or a connected person comes to hold another right (whether or not acquired from the person to whom the other right was assigned) and any of those transactions was effected under arrangements to which two or more persons holding rights in respect of which tax may be chargeable under this section were parties, those transactions shall be treated for the purposes of subsection (8) as a single transaction whereby the one right is assigned for a consideration which consists of or comprises the other right.

(b) This subsection applies in relation to two or more transactions, whether they involve an assignment preceding, coinciding with, or subsequent to, an acquisition.

(10) If a gain chargeable to tax under subsection (2) or subsection (6) is realised by the exercise of a right, paragraph 3 of Schedule 1 of the Capital Gains Tax Act, 1975 , shall apply as if a sum equal to the amount of the gain so chargeable to tax formed part of the consideration given by the person acquiring the shares for their acquisition by him.

(11) (a) Where, in the year 1986-87 or any subsequent year of assessment, a person grants a right in respect of which tax may become chargeable under this section, or allots any shares or transfers any asset in pursuance of such a right, or gives any consideration for the assignment or release in whole or in part of such a right, or receives written notice of the assignment of such a right, he shall deliver particulars thereof in writing to the inspector not later than thirty days after the end of that year.

(b) Schedule 15 of the Income Tax Act, 1967 , is hereby amended by the insertion in column 2 of “Finance Act, 1986, section 9 (11) (a)”.