What is the purpose of section 408 of the Income Tax (Trading and Other Income) Act 2005?

Section 408 prevents double taxation on dividend shares leaving a Share Incentive Plan. It reduces the income tax charge arising under section 407 by the amount of tax already paid on capital receipts relating to those same shares under section 501 of ITEPA 2003, ensuring the participant is not taxed twice on the same economic value.

How does the tax reduction under section 408 work in practice?

The reduction operates on a pound-for-pound basis. Any tax already paid on capital receipts in respect of the relevant dividend shares under section 501 of ITEPA 2003 is set directly against the tax liability arising under section 407 when those shares cease to be held in the SIP, reducing the amount owed accordingly.

How are the relevant shares identified for the purposes of section 408 relief?

Section 508 of ITEPA 2003 contains the identification rules that determine which specific shares are treated as ceasing to be subject to the Schedule 2 Share Incentive Plan. These rules feed directly into the operation of section 408, ensuring the correct shares and their associated capital receipt tax history are matched for the relief calculation.

Can you give an example of section 408 reducing a tax charge on SIP dividend shares?

If a participant paid £100 tax on a capital receipt under section 501 of ITEPA 2003 while dividend shares were held in a SIP, and a section 407 charge of £350 arises when those shares later leave the plan, section 408 reduces the £350 liability by £100, leaving only £250 due.

Income Tax (Trading and Other Income) Act 2005 section 408

Reduction in tax due in cases within section 407

Section 408 provides a mechanism for reducing the income tax charge on dividend shares leaving a Share Incentive Plan (SIP) where the participant has already paid tax on capital receipts relating to those same shares.

This section applies where a person owes tax under section 407 on dividend shares ceasing to be held in a Schedule 2 SIP, and has also paid tax on capital receipts relating to those shares under section 501 of ITEPA 2003.
The tax due under section 407 is reduced by the amount of tax already paid on those capital receipts, preventing a double tax charge on the same shares.
"The tax due" is defined strictly as the amount of tax arising as a result of section 407, ensuring the reduction applies only to that specific liability.
Rules for identifying which shares have ceased to be subject to a Schedule 2 SIP are set out in section 508 of ITEPA 2003.

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