What does section 494 of the Income Tax (Earnings and Pensions) Act 2003 do?

Section 494 ensures that employees holding shares under a Share Incentive Plan are not subject to income tax charges when forfeiture provisions attached to their shares are varied or removed, or when the holding period expires. It disapplies the general charging provisions in sections 427 and 449 for SIP plan shares.

Does removing a forfeiture provision on SIP shares trigger an income tax charge?

No. Although section 427 normally charges income tax when restrictions on securities are removed or varied, section 494 disapplies this for Share Incentive Plan shares. If a forfeiture provision is varied or removed — for example, because the employee has met the required service period — no income tax charge arises.

What happens for tax purposes when the SIP holding period ends?

When the holding period for SIP shares comes to an end, no income tax charge arises under section 449 in respect of that event. The holding period is the minimum time an employee must hold shares before withdrawing them from the plan without tax penalties, as defined in paragraph 36 of Schedule 2.

Where are the key terms 'provision for forfeiture' and 'holding period' defined in the Act?

The key terms are defined in Schedule 2 of the Income Tax (Earnings and Pensions) Act 2003. 'Provision for forfeiture' is defined at paragraph 99(1) and 'holding period' is defined at paragraph 36. These definitions govern how the tax protections in section 494 apply to Share Incentive Plan shares.

Income Tax (Earnings and Pensions) Act 2003 section 494

No charge on removal of restrictions applying to shares

Section 494 ensures that employees holding shares under a Share Incentive Plan are not subject to income tax charges when forfeiture provisions attached to their shares are changed, removed, or when the holding period for those shares expires.

Where plan shares are subject to forfeiture provisions and those provisions are varied or removed, no income tax charge arises under the rules that normally apply to restricted or convertible securities (sections 427 and 449).
Similarly, when the required holding period for plan shares comes to an end, no income tax charge arises under section 449 (which deals with convertible securities).
This is the first of three sections dealing with the tax advantages of holding shares within a Share Incentive Plan.
The key terms — "provision for forfeiture" and "holding period" — are defined in Schedule 2 of the Act, at paragraphs 99(1) and 36 respectively.

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