Revenue Note for Guidance
512 Disposals of scheme shares
Summary
If the trustees dispose of a participant’s share before the release date or, if earlier, before the date of the participant’s death, the participant is charged to income tax under Schedule E on the appropriate percentage of the lesser of —
- the locked-in value of the share, and
- the proceeds of disposal.
If shares are disposed of otherwise than at arm’s length, the market value of the shares disposed of is substituted for the amount of the sale proceeds for the purpose of calculating the charge to tax. Where the disposal of shares is made from a holding which was allocated to the participant at different times the “first-in-first-out” identification rule applies for the purpose of determining the initial market value and the locked-in value of those shares and the appropriate percentage to be applied in relation to each of those shares.
If a participant dies while the trustees are holding shares on his/her behalf, his/her personal representatives can dispose of the shares immediately and no part of the sale proceeds will attract liability to income tax under the section.
Details
Locked-in value
(1) Subject to sections 514 (which provides, in the case of a company reconstruction or amalgamation, that the locked-in value is determined by apportioning the locked-in value of the old shares among the new shares) and 515(6) (which provides that the locked-in value of unauthorised or excess shares is their market value at that time), the locked-in value of a participant’s shares at any time is (if there has been a capital receipt in respect of the shares) the amount by which their initial market value exceeds the amount or value of that capital receipt or the aggregate of such receipts. If there have been no capital receipts in respect of the shares, the locked-in value of the shares is their initial market value. Examples of the case where there has been a capital receipt are given in the note on section 513.
Disposal of shares before release date
(2) & (3) If the trustees dispose of a participant’s share before the release date or, if it is earlier, before the date of the participant’s death, the participant is liable to income tax under Schedule E for the year of assessment in which the disposal takes place on the lesser of the appropriate percentage of —
- the locked-in value of the shares, and
- the proceeds of the disposal.
It should be noted that no liability to tax is imposed in relation to disposals made before the release date but after the date of the death of the participant.
Example 1
1 January, 2005: 100 shares allocated to an employee.
The shares are valued at €3 each as at this date.
31 July, 2007: The shares are disposed of for €2 each.
The disposal proceeds, €200 are less than the locked-in value, €300, therefore income tax is charged on €200 (100% of €200).
Example 2
The facts are as stated in Example 1 but in this disposal proceeds are €5 per share.
The locked-in value, €300, is less than the disposal proceeds, €500, therefore income tax is charged on €300.
Rights issues
(5)(b) The references in this note to the rights arising under a rights issue is to be taken as references to rights conferred in respect of a participant’s shares, being rights to be allotted other shares in the same company which are to be paid for.
(4) If at any time before the disposal of any of a participant’s shares the participant has made a payment or payments to the trustees to enable them to exercise rights arising on a rights issue on his/her behalf, the proceeds of any disposal of shares following the rights issue are to be reduced (in order to calculate whether the proceeds are less than the acquisition cost) by that proportion of the amount or amounts provided by the participant to enable the trustees to exercise rights on his/her behalf which the market value of the shares disposed of bears to the market value of the participant’s total holding of scheme shares at the time of the disposal.
Shares acquired under a rights issue must be held by trustees in the same way as the original shares.
Example
On 1 January, 2005, 100 shares, valued at €5 each, are allocated to an employee.
On 1 July, 2007, there is a rights issue, 1 for 2 at €2 each. Participant pays €100 to take up rights shares. On 1 October, 2007, he/she disposes of 80 shares at €6 each.
Date |
Number of shares |
Locked-in value (LIV) |
Payment for rights |
|||||||
1 January, 2005 |
100 |
€500 |
— |
|||||||
1 July, 2007 |
100+50=150 |
€500 |
€100 |
|||||||
1 October, 2007 |
80 |
€266* |
||||||||
|
||||||||||
Adjustment to disposal proceeds
Consideration for rights |
€100 |
|||||||
Market value of 80 shares sold |
€480 |
|||||||
Market value of remaining shares |
€420 |
(70 × €6) |
||||||
Reduction in disposal proceeds
|
€54 |
Reduced disposal proceeds €480 – €54 = €426
The LIV of the shares (€266) is less than the reduced disposal proceeds (€426), accordingly income tax is charged on €266 (100% of €266).
(5)(a) The term “shares” (which includes stock by virtue of section 509(4)), in relation to a new holding arising on a rights issue, is extended to include securities and rights of any description. In other words, if as a result of a company reconstruction, the shares originally allocated are replaced by shares or stock which do not satisfy the conditions required for the approval of a scheme as set out in Part 2 of Schedule 11 that does not means that the scheme automatically ceases to be “approved”.
(5)(b) Any payment to trustees, to the extent that it consists of the proceeds from the sale of some of the rights arising under a rights issue, which are used by the trustees, at the direction of the participant, to take up the balance of the rights are not to be taken into account for the purpose of reducing the proceeds of a disposal of shares following a rights issue. The proceeds so used do not come from the participant’s own resources but are essentially derived from the shares and accordingly cannot be taken into account for the purposes of that reduction.
If there is more than one disposal following a rights issue, the amount of the payment or payments to be taken into account in calculating the reduction in the disposal proceeds following a rights issue is itself to be reduced by the amount of any reductions which have already been made on earlier disposals.
Example
The facts are as in the previous example, except that on 1 December, 2007 the remaining 70 shares are disposed of at €5 each.
The locked-in value of the 70 shares sold is €234 (€500 – €266). The disposal proceeds are €350.
Adjustment to disposal proceeds
Consideration for rights €100.
Deemed reduction from consideration by virtue of reduction in sale proceeds on previous occasion €54.
For the purposes of the second disposal the consideration for the rights is taken as €46 (€100 – €54).
The reduction in disposal proceeds is —
350 |
||
€46× |
= €46 |
|
350 |
Reduced disposal proceeds €350 – €46 = €304.
The LIV (€234) of the shares sold is less than the reduced disposal proceeds, accordingly income tax is charged on €234 (100% of €234).
Identification of shares
(6) Where the trustees dispose of a participant’s shares before the release date or, if earlier, before the date of the participant’s death and the disposal is made from a holding of shares which were allocated to the participant at different times, then, for the purposes of determining the initial market value and the locked-in value of each of those shares and the appropriate percentage in relation to each of those shares, the first-in-first-out identification rule is to be observed (that is, each is to be treated as being of shares which were allocated earlier before those which were allocated later).
Example
1 January, 2005: 100 shares, valued at €5 each, are allocated to employee.
1 January, 2007: 200 shares, valued at €2 each, are allocated to the same employee.
1 October, 2007: 150 shares are disposed of at €2.50 each.
Under the identification rule the calculations are to be made as if the 150 shares sold comprised the 100 shares which were allocated on 1 January, 2005, and 50 of the shares which were allocated on 1 January, 2007.
First allocation
Disposal proceeds of 100 shares, treated as if they were those allocated on 1 January, 2005 – €250. Locked-in value of 100 shares allocated on 1 January, 2005 – €500. Income tax is charged on €250 (100% of €250).
Second allocation
Disposal proceeds of 50 shares treated as allocated on 1 January, 2007 – €125. Locked-in value of 50 shares allocated on 1 January, 2007 —
50 |
||
€400× |
= €100 |
|
200 |
Income tax is charged therefore on €100 (100% of €100).
Disposal of beneficial interest
(7) If at any time a participant disposes of his/her beneficial interest in his/her shares, but no formal transfer of the shares is executed, the disposal is to be treated as if it were a disposal of the shares themselves for the like consideration) as was obtained for the disposal of the beneficial interest. There is no disposal of the participant’s beneficial interest if that interest becomes vested in any person on the insolvency of the participant (for example, if it vests in the Official Assignee, etc under the Bankruptcy laws) or otherwise by operation of law.
[The consequences of the assignment of a beneficial interest during the period of retention are dealt with in the notes on section 511(7) and in the next paragraph.]
Substitution of market value for sale proceeds in certain circumstances
(8) Where —
- a transfer of shares to trustees occurs before the release date,
- any other disposal occurs in relation to which the Revenue Commissioners are of the opinion that the disposal is not at arm’s length, and
- a disposal of shares occurs in consequence of the disposal of the participant’s beneficial interest during the period of retention,
then, the market value of the shares disposed of is to be substituted for the amount of the sale proceeds for the purpose of calculating the charge to income tax.
Relevant Date: Finance Act 2019