Share Options Deferral of Payment of Income Tax

Introduction

Section 27 Finance Act 2000, inserts a new section 128A TCA 1997, which makes provision for a taxpayer to elect to defer payment of the income tax payable on the gain arising on the exercise of a share option for up to 7 years, the details of which are outlined in Tax Briefing, Issue 40 [June 2000]. The provision applies to share options exercised on or after 6 April 2000.

This article deals with the question of Preliminary Tax and the making of an Election to defer payment of income tax payable.

Preliminary Tax - Year of Exercise

Tax charged in an assessment to income tax is due and payable on the Preliminary Tax due date where:

• the chargeable person has defaulted in making the payment of Preliminary Tax (PT)
• the PT paid is less than the least of
  • ~ 90% of the tax payable for the year of assessment
  • ~ the tax payable for the preceding year of assessment or
  • ~ 105% of the tax payable for the year preceding the preceding year of assessment where the PT is paid by direct debit
• the chargeable person has not paid the PT on the PT due date (currently 1 November in year of assessment).

Where an election is made to defer the tax payable on the exercise of a share option, in accordance with section 128A TCA 1997, the tax payable for the year of assessment for the purposes of the 90% rule will be regarded as the tax payable for that year of assessment less the deferred amount of income tax payable.

Preliminary Tax - Year of Payment of deferred amount of tax payable

The tax liability on the exercise of a share option remains the liability for the year of assessment in which the share option is exercised, notwithstanding that an election is made to defer the payment of the tax due.

The deferred amount of tax payable is separate from the PT due and payable for the year of assessment in which the deferred amount becomes payable.

Payment of the deferred tax

Payment of the deferred amount must be made on or before the earlier of:

• 1 November in the year of assessment following the year of assessment in which the shares are disposed of, or
• 1 November in the year of assessment following the year of assessment beginning 7 years after the year of assessment in which the share option(s) is/are exercised.

The normal principles of self-assessment will apply in relation to the payment of the deferred tax, i.e. the taxpayer is obliged to make a timely payment of the deferred income tax whether or not a demand has issued for the tax. Interest charges will arise for late payment. The interest will run from the relevant due date above, as appropriate.

To satisfy the 90% PT Rule for the year 2000/2001, the employee needs to pay £7,200 i.e. 90% of £8,000.

Payment of the deferred amount of tax payable, i.e. £4,400 is due on or before 1 November 2005.

If in this example, the employee retains the shares until on or after 6 April 2008, the payment of the £4,400 is due on or before 1 November 2008.

Election

An election to defer payment of income tax payable on the gain arising on the exercise of a share option(s) must be made in writing to the Inspector by the normal return filing date i.e. on or before 31 January after the relevant year of assessment. A taxpayer may find it convenient to make the election when filing his or her timely return of income.