What happens for capital gains tax purposes when shares are forfeited under a share incentive plan?

Under Schedule 7D paragraph 7 of the Taxation of Chargeable Gains Act 1992, forfeited plan shares are treated as disposed of by the participant and reacquired by the plan trustees. Both sides of this deemed transaction use the market value of the shares on the date the forfeiture takes place.

Is there a capital gains tax liability when share incentive plan shares are forfeited?

No. Any gain arising on the deemed disposal of forfeited plan shares is not treated as a chargeable gain. This means the participant faces no capital gains tax liability, even if the shares have increased in value between the original acquisition date under the plan and the forfeiture date.

What base cost do the plan trustees have for shares reacquired following a forfeiture?

The plan trustees are treated as having reacquired the forfeited shares at market value on the forfeiture date. This market value becomes their base cost going forward and will be relevant if those shares are later allocated to another participant or otherwise disposed of by the trustees.

Can you give an example of how the forfeiture rules work in practice?

If a participant was awarded 500 shares at £2 each and leaves before the holding period expires when shares are worth £3 each, the deemed disposal is at £1,500. The notional £500 gain is exempt from capital gains tax, and the trustees' new base cost is £1,500.

Taxation of Chargeable Gains Act 1992 Schedule 7D paragraph 7

Treatment of forfeited shares

Section 7 of Schedule 7D deals with the capital gains tax treatment when a participant's shares held under a share incentive plan are forfeited.

Forfeited plan shares are treated as disposed of by the participant and acquired by the trustees at market value on the date of forfeiture
The deemed disposal price is the market value of the shares at the forfeiture date
Any gain arising on this deemed disposal is exempt from capital gains tax
The trustees' base cost for the reacquired shares is the market value at the date of forfeiture

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