511 The period of retention, release date and appropriate percentage

Summary

This section provides that a scheme to obtain the benefit of the tax treatment provided by this Chapter must be one approved by the Revenue Commissioners.

Details

Definitions

(1) The “period of retention” is the period starting on the date on which shares are allocated to the participant and ending on the second anniversary of that date or, if it is earlier —

• the date on which the participant ceases to be an employee of the company running the scheme (or of a participating company in the case of a group scheme) on account of injury, disability or redundancy;
• the date on which the participant reaches pensionable age for social welfare purposes (this is, 66 years); or
• the date of the participant’s death.

(2) The “release date” (which is the date after which a participant in an approved scheme may dispose of shares acquired under the scheme without being liable for income tax) is —

• as and from 10 May, 1997, the 3rd anniversary of the date the shares were allocated to the participant, and
• before 10, May, 1997, the 5th anniversary of the date the shares were allocated to the participant.

(3),(3)(b)(i), (3)(b)(ii), (3)(b)(iii) The “appropriate percentage” is a percentage of the locked-in value of shares disposed of after the period of retention and before the release date. The application of the appropriate percentage to the locked-in value of shares disposed of gives the amount on which income tax is charged under section 512. The appropriate percentages, tapered on an a time basis, may be summarised as follows —

Disposals before 10 May, 1997
Period held	Percentage of locked-in value (or sale proceeds if smaller)
Before the 4th anniversary (after the date of allocation of the shares)	100 per cent
On or after the 4th anniversary and before the 5th anniversary	75 per cent
Before the 5th anniversary and the participant ceases to be an employee/director because of injury, disability, redundancy or reached pensionable age	50 per cent

(3)(a)(i), (3)(a)(ii) Disposals on or after 10 May, 1997

Before the 3rd anniversary (after the date of allocation of the shares)	100 per cent
Before the 3rd anniversary and the participant ceases to be an employee/director because of injury, disability, redundancy or reaching pensionable age	50 per cent

The appropriate percentage in relation to excess or unauthorised shares is 100 per cent of their market-value at the date of disposal.

Obligations of participant

(4) No scheme is to be approved of by the Revenue Commissioners unless the Revenue Commissioners are satisfied there is a contractual agreement between the participant and the company which has established the scheme imposing certain obligations on the participant.

These obligations require each participant under contract with the company —

• to permit his/her shares to remain in the hands of the trustees throughout the period of retention,
• not to assign, charge or otherwise dispose of his/her beneficial interest in his/her shares during that period,
• to pay to the trustees, before a transfer of ownership takes place, a sum equal to the amount of the locked-in value multiplied by the standard rate of income tax, if the participant directs the trustees to transfer ownership of the shares to him/her at any time before the release date,
• not to direct the trustees to dispose of his/her shares at any time before the release date other than for sale for the best consideration in money that can be obtained at the time of sale.

(5) The obligation to pay a sum equal to income tax at the standard rate imposed on a person who directs the trustees to transfer ownership of the shares to him/her before the release date is not to be construed as binding his/her personal representatives to pay any sum to the trustees. It should be noted that, if a participant dies while the trustees are holding scheme shares on his/her behalf, the period or retention comes to an end immediately even if the shares have been held for less than 3 years. The tax charge is confined to disposals made before the release date or, if it is earlier, before the date of the participant’s death. Accordingly a participant’s personal representatives can dispose of the shares immediately and no part of the sale proceeds will attract liability to income tax.

Mitigation on restrictions on disposals of shares

(6) The restrictions imposed on a participant’s rights in respect of shares allocated to him/her are relaxed in certain circumstances. In particular, the obligation requiring the participant to accept that the shares are to remain in the hands of the trustees during the period of retention is relaxed so as to enable the participant to instruct the trustees to accept (for example, in a prospective takeover of the company running the scheme) either a share for share offer, or a cash offer, or an offer partly of shares and partly of cash, in respect of his/her scheme shares, even though this may result in the disposal of the shares during the period of retention. The tax consequences of offers of this kind are dealt with in sections 513 and 514.

The obligations imposed on a participant are mitigated by —

• (6)(a) securing that any obligation imposed on a participant is not to prevent him/her from directing the trustees to accept an offer for any of his/her shares if this would result in a new holding (within the meaning of section 594) being equated with the original shares for the purposes of capital gains tax,
• (6)(b) enabling a participant to direct the trustees to agree to a transaction affecting his/her shares or such of them as are of a particular class if the transaction would be entered into pursuant to an arrangement or scheme affecting —
  • all the ordinary share capital of the company or all the shares of the class held by the participant, or
  • all the shares or class of shares in question which are held by a class of shareholders identified otherwise than by their employment or their participation in an approved scheme,
• (6)(c) enabling a participant to direct the trustees to accept a cash offer (with or without other assets) for shares if the offer is part of a general offer and the person making the offer, if it is taken up, would achieve control of the company (as defined in section 11),
• (6)(d) enabling a participant after the expiry of the retention period, to sell his/her beneficial interest in shares to the trustees for the best consideration in money that can reasonably be obtained at that time for the shares.

Disposal of beneficial interest

(7) Where a participant assigns, charges or otherwise disposes of any of his/her beneficial interest in any of his/her shares during the period of retention, he/she is treated as respect those shares, as if at the time they were allocated to him/her, he/she were ineligible to participate in the scheme and section 515 applies accordingly.

Relevant Date: Finance Act 2019