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

Exclusions: earmarking for employee share schemes (2)

Section 554K provides an exclusion from the disguised remuneration rules (Chapter 2) where shares are earmarked by a third party to satisfy awards under an employer's employee share scheme that is conditional on a specified exit event, such as a trade sale or stock exchange listing.

• Where an employer operates a share scheme under which awards of shares (or cash determined by reference to share value) are conditional on a specified exit event occurring, shares earmarked to meet those awards are excluded from the disguised remuneration charge, provided certain conditions are met
• The exclusion only applies if the shares are in a trading company (or its parent), the number earmarked is reasonable, there is a genuine chance the exit event will occur, and there is no connection with a tax avoidance arrangement
• If shares are earmarked in anticipation of an award that is not actually made within three months, or if the earmarked shares cease to be held solely for the purpose of meeting the award, the exclusion is lost and a disguised remuneration charge arises at that point
• Once an exit event occurs, the employer has a six-month window in which to deliver the shares or pay the cash to the employee; any earmarked shares not dealt with by the end of that period trigger a disguised remuneration charge