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

Exclusions: earmarking for employee share schemes (4)

Section 554M provides an exclusion from the disguised remuneration rules where shares are earmarked in connection with an employee share scheme that grants options exercisable only upon a specified exit event.

• An employee share option granted under a qualifying scheme must relate to shares in a trading company (or its parent), and its main purpose must not be to provide relevant benefits
• The option must be exercisable only on a specified exit event (such as a sale or listing of the company), and there must be a reasonable chance at the time of grant that the exit event will actually occur
• Shares earmarked to fulfil such an option are excluded from the disguised remuneration charge, provided the number earmarked does not exceed what is reasonably needed and there is no connection with a tax avoidance arrangement
• If the conditions for the exclusion cease to be met — for example, if the option is not granted within three months, the shares stop being held solely for the option, or the exit event occurs and the option is not properly exercised within the exit period — a disguised remuneration charge is triggered on the earmarked shares and any related income