Income Tax (Earnings and Pensions) Act 2003 section 554L

Exclusions: earmarking for employee share schemes (3)

Section 554L provides an exclusion from the disguised remuneration rules (Chapter 2) for shares earmarked to fulfil obligations under an employee share option scheme, provided certain conditions are met, and sets out the circumstances in which the exclusion is lost and a tax charge arises.

• Shares earmarked solely to satisfy a qualifying employee share option (with a vesting date no more than ten years from grant and genuine performance conditions) are excluded from the Part 7A disguised remuneration charge, provided there is no link to a tax avoidance arrangement.
• If shares are earmarked in anticipation of an option grant that does not materialise within three months, or if the earmarked shares cease to be held for their original share-scheme purpose while remaining held by or on behalf of the same person, the exclusion is lost and a deemed relevant step triggers a Chapter 2 charge.
• Where a share option is granted, any earmarked shares still held at the end of the final exercise date (ten years after the grant date) that have not been used to satisfy a valid exercise, lapsed, or been released following forfeiture, are also brought back into the Chapter 2 charge along with any related income from those shares.
• The number of earmarked shares must not exceed the maximum reasonably expected to be needed to satisfy the option, and the exclusion only applies where the main purpose of the option grant is not the provision of relevant benefits.