Share Schemes - Restricted Shares

Introduction

Shares acquired by employees on the exercise of options/rights and under other employee share offer schemes may be subject to a restriction or clog where disposal is prohibited for a number of years. The focus of this article is on such shares and is based on current practice.

In it we outline Revenue’s:

• View on the market value of such shares at the date of acquisition
• Practice of abating the gain chargeable to income tax
• View on the base cost for capital gains tax purposes.

Market value at date of acquisition

Two issues arise as to whether or not:

• shares with a prohibition on sale, and
• the same shares without a prohibition on sale

have the same market value for income tax purposes.

It is our view that a restriction on the sale of a share does not affect the market value of such a share.

Abatement of gain chargeable to income tax

Revenue recognises that a restriction on the sale of shares could be said to reduce the benefit acquired by the individual particularly, for example, where the individual would like to dispose of the shares immediately but is prohibited. Revenue are prepared, in cases where there is a genuine restriction, to allow the following % abatements on the gain chargeable to income tax:

No. of years of restriction on sale	Abatement
1 Year	10%
2 Years	20%
3 Years	30%
4 Years	40%
5 Years	50%
over 5 Years	55%

Example

Share offer granted/option exercised (short option*)	1/3/98
Subscription/exercise price	₤4,000
Market value at 1/3/98	₤5,000
Restriction on sale of share	3 years

Income Tax - 1997/98

Market Value	₤5,000
Price paid	₤4,000
Gain	₤1,000
Abatement (30%)	₤300
Amount chargeable to income tax	₤700

Base cost for Capital Gains Tax purposes

Where an income tax abatement is given the base cost for Capital Gains Tax purposes is as follows:

On the exercise of an option/right

• Cost of the option/right, if any, and
• Price paid for the shares on the exercise, and
• Any amount charged to income tax^* (Section 128(10) Taxes Consolidation Act 1997).

Under other employee share offers where the benefit is assessable

• Price paid for the shares, and
• Any amount charged to income tax^*.

Alteration of terms

In cases where the original restriction on the sale of the shares is either removed or amended, the income tax charge will be amended to reflect such change. A similar adjustment will be made in cases where the shares are disposed of prior to the end of the clog period.

Requirements

Companies wishing to avail of the abatement should contact their local Inspector of Taxes. Any alteration to the terms of the grant/award, as mentioned in the previous paragraph, should also be notified to the Inspector.

Details of:

• All grants of options/rights, and
• Allocations of shares under any options/rights

must be made to the Inspector not later than 30 days after the end of the tax year in accordance with Section 128(11) Taxes Consolidation Act 1997 on Form SO 2. Details of other share awards should be included in Form P11D in accordance with Section 897 Taxes Consolidation Act 1997

Anti-avoidance

The prohibition on the disposal of shares must be for genuine commercial reasons and not simply used for the purpose of tax avoidance.The above practice will be subject to review and Revenue reserve the right to amend or withdraw it.