Luiza, the finance director of Damiana plc, wishes to know the tax implications for her of two alternative ways of acquiring shares in Damiana plc.

Damiana plc:
– Is a UK resident quoted trading company.

Luiza:
– Is employed as the finance director of Damiana plc, earning a gross annual salary of £165,000.
– Has no other source of taxable income.
– Has been offered two alternative ways to acquire ordinary shares in Damiana plc.
– In either case she will sell these shares on 10 November 2020 when their market value is expected to be £32·70 per share.
– Uses her annual exempt amount for capital gains tax purposes each year.

Acquisition of Damiana plc shares – alternative 1:
– Damiana plc will transfer 5,000 ordinary shares (a 1% holding) to Luiza on 1 November 2017 for which Luiza will pay £1 per share.
– The market value of these shares on 1 November 2017 is expected to be £24·50 per share.
– Damiana plc does not expect to pay a dividend in the foreseeable future.

Acquisition of Damiana plc shares – alternative 2:
– Damiana plc will grant options over 5,000 ordinary shares to Luiza on 1 November 2017 under its newly established enterprise management incentive (EMI) scheme.
– The exercise price of these options will be £23·00 per share.
– Luiza will exercise the options on 2 November 2020.

Required:
(c) Explain the tax implications for Luiza if she acquires 5,000 ordinary shares in Damiana plc alternatively,(1) by means of a transfer on 1 November 2017, or (2) as a result of exercising the share options on 2 November 2020. On the assumption that she sells the shares as planned on 10 November 2020, calculate Luiza’s net increase in wealth under each alternative. (12 marks)