Revenue Note for Guidance

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Revenue Note for Guidance

513 Capital receipts in respect of scheme shares

Summary

This section ensures that capital receipts in relation to scheme shares which arise at a time when a participant’s shares are held by trustees are subject to a charge to income tax on the participant.

Any capital receipt the entitlement to which arises after a participant’s death is not to be charged to income tax under this section.

Details

(1) If the trustees (or a participant) become entitled before the release date to receive any money or money’s worth (referred to in the section and this note as a “capital receipt”) in respect of, or by reference to, a participant’s shares, the participant is to be charged to income tax under Schedule E for the year of assessment in which the entitlement arises on the appropriate percentage (determined at the time when the entitlement arises) of the amount or value of the receipt.

(2) Money or money’s worth is not a capital receipt to the extent that it —

  • already constitutes income in the hands of a recipient for income tax purposes, (for example, a dividend on scheme shares),
  • consists of the proceeds of a disposal of scheme shares,
  • consists of “new shares” (that is, shares issued under a company reconstruction or amalgamation and which were issued in respect of, or otherwise represent, the original shares).

(3) The term “capital receipt” does not include the proceeds of the disposal of part of the rights arising under a rights issue, provided those proceeds are used to exercise other such rights. Accordingly, there is no charge to income tax on such proceeds.

(4) If the amount or value of a capital receipt would exceed the sum which, immediately before the entitlement to the receipt arose, was the locked-in value of the shares in respect of which the capital receipt arose, the charge to tax is to be restricted to the appropriate percentage of the locked-in value of the shares immediately before the entitlement.

(5) There is no charge to tax on a capital receipt where the entitlement arose after the death of the participant to whose shares the receipt is referable.

(6) Excluded from the charge to tax is any receipt the amount or value of which does not exceed €13.

Example

1 January 2005: 500 shares, valued at €1 each, allocated to participant.

1 July 2006: Capital receipt of 10c per share (that is, €50 received).

1 January 2007: Capital receipt of €1 per share (that is, €500 received).

1 October 2007: The shares are sold for €3 each.

The locked-in value of the shares immediately before the first capital receipt is €500.

First capital receipt

There is an income tax charge for 2006 on the first receipt.

Income tax is charged on €50 (100% of €50).

The locked-in value of the shares immediately after the receipt is €500 – €50 = €450.

Second capital receipt

There is an income tax charge for 2007 on the second receipt.

As the value of the receipt (€500) exceeds the locked-in value of the shares before the receipt (€450) the income tax charge is on the appropriate percentage of the locked-in value i.e. €450 (100% of €450).

Immediately after the second receipt the locked-in value of the shares is NIL (€450 – €450) and so there is no income tax charge on the disposal of the shares on 1 October, 2007.

Relevant Date: Finance Act 2019