ACCA ATX ^UK Syllabus A1. Income tax - Share option/Share incentive schemes - Past Papers ^{1 / 3}

Rod has requested advice in relation to the capital gains tax implications of selling shares he obtained through his employer’s enterprise management incentive (EMI) scheme.

Rod:
– Is resident and domiciled in the UK.
– Was employed for many years by Lumba plc, before taking early retirement on 30 June 2018.
– Joined the Thora Partnership on 1 December 2018.
– Made no disposals for capital gains tax in the tax year 2018/19, other than the sale of his shares in Lumba plc (as detailed below).

Sale of Lumba plc shares:
– In May 2014, Lumba plc granted Rod options to purchase 20,000 shares under its EMI scheme.
– The market value of a share at the date of the grant was £2·60 and the option price was £2·30 per share.
– Rod exercised all of the options on 1 June 2018, when the market value was £3·90 per share.
– Rod sold all the shares on 1 December 2018, when the market value was £4·00 per share.
– The gain is eligible for entrepreneurs’ relief.

Required:
(a) Calculate Rod’s after-tax proceeds from the sale of his shares in Lumba plc and explain your calculation of the base cost for the shares. (6 marks)

Demeter has recently taken up a new employment and is seeking advice on the tax treatment of certain components of his remuneration package.

Demeter:
– Is UK resident and domiciled.

– Commenced employment with Poseidon Ltd on 1 December 2018.

– Will have no source of income, other than from Poseidon Ltd, in all relevant future tax years.

– Will be a higher rate taxpayer in all relevant future tax years.

Remuneration package from Poseidon Ltd:
– Demeter will receive an annual salary of £130,000.

– On 1 December 2018, Poseidon Ltd made a one-off lump sum payment of £20,000 to Demeter as an inducement to take up employment with the company.

– On 1 December 2018, Demeter was granted share options in Poseidon Ltd’s unapproved share option scheme.

Poseidon Ltd’s share option scheme:
– On 1 December 2018, Poseidon Ltd granted Demeter options over 3,000 shares in its unapproved share option scheme at a 5% discount on the market value of the shares on that date.

– The market value of Poseidon Ltd shares on 1 December 2018 was £4·20 per share.

– Demeter will exercise the options on 6 April 2024, and immediately sell the shares.

– Poseidon Ltd believes that the market value of its shares on 6 April 2024 will be £6·00 per share.

Required:
(c) Explain, with supporting calculations, the tax consequences for Demeter of participating in:

(ii) Poseidon Ltd’s unapproved share option scheme, in respect of the grant of the options on 1 December 2018 and the exercise of the options and subsequent sale of the shares on 6 April 2024. (4 marks)

Note: Ignore national insurance contributions (NIC) in part (ii).

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)

Your firm has been asked to provide advice to Methley Ltd, a close company, in respect of the provision of share incentives, a motor car and an interest-free loan to employees.

Methley Ltd:
– Is a UK resident trading company which is a close company.

Simon – share incentives:
– Simon is a director of Methley Ltd and owns 20% of its ordinary shares.
– Methley Ltd intends to provide Simon with shares worth £25,000, in the form of either free shares or share options.
– The free shares would be issued as employee shareholder shares in June 2017.
– The share options would be issued under an approved company share option scheme (CSOP) in June 2017 and Simon would exercise the options in October 2021.
– In either case, Simon will sell the shares in December 2022.
– Simon is a higher rate taxpayer.

Required:
(a) Compare and contrast the tax implications of both the acquisition and disposal of the shares in Methley Ltd if Simon acquires the shares through an approved company share option scheme (CSOP) or, alternatively, as employee shareholder shares.

Note: You are not required to comment on any national insurance contributions implications. (7 marks)

Klubb plc, a client of your firm, requires advice on the establishment of an approved tax-efficient share scheme

Klubb plc:
– Is a UK resident trading company.
– Intends to establish an approved tax-efficient share plan.

Approved tax-efficient share plan:
– The plan will be either an approved share incentive plan (SIP) or an approved company share option plan (CSOP).
– If a SIP, the shares would be held within the plan for five years.
– If a SIP, members will not be permitted to reinvest dividends in order to purchase further shares.
– If a CSOP, the options would be exercised within five years of being granted.
– In both cases it can be assumed that the plan members would sell the shares immediately after acquiring them.

Klubb plc wants the share plan to be flexible in terms of:
– The employees who can be included in the plan.
– The number or value of shares which can be acquired by each plan member.

Required:
(b) Compare and contrast an approved share incentive plan with an approved company share option plan in relation to:
– the flexibility desired by Klubb plc regarding the employees included in the plan and the number or value of shares which can be acquired by each plan member; and
– the income tax and capital gains tax implications of acquiring and selling the shares under each plan. (9 marks)

Your firm has been asked to provide advice to Pita plc in respect of the establishment of an enterprise management incentive scheme.

Pita plc:
– Is a UK resident company which trades in the UK and is quoted on the UK Stock Exchange.
– Has an issued share capital of 10,000,000 irredeemable £1 ordinary shares.
– Has gross assets of £24,000,000 and 180 employees.

Issues – Pita plc:
– Intends to establish an enterprise management incentive (EMI) scheme for nine key employees.

The EMI scheme:
– The scheme would reward seven full-time and two part-time key employees.
– Each key employee will be granted an option to acquire 10,000 shares at £1·75 per share.
– The options will be exercised in six years’ time when the shares are expected to be worth £5 each.
– An ordinary share in Pita plc is expected to be worth £2 when the options are granted.

Required:
(b) (i) Explain, with reference to the information provided, whether or not Pita plc is a qualifying company for the purpose of the enterprise management incentive (EMI) scheme and if it is able to make the scheme available to just the nine key employees. (4 marks)

Your firm has been asked to provide advice to Pita plc in respect of the establishment of an enterprise management incentive scheme.

Pita plc:
– Is a UK resident company which trades in the UK and is quoted on the UK Stock Exchange.
– Has an issued share capital of 10,000,000 irredeemable £1 ordinary shares.
– Has gross assets of £24,000,000 and 180 employees.

Issues – Pita plc:
– Intends to establish an enterprise management incentive (EMI) scheme for nine key employees.

The EMI scheme:
– The scheme would reward seven full-time and two part-time key employees.
– Each key employee will be granted an option to acquire 10,000 shares at £1·75 per share.
– The options will be exercised in six years’ time when the shares are expected to be worth £5 each.
– An ordinary share in Pita plc is expected to be worth £2 when the options are granted.

Required:
(b) (ii) On the assumption that an EMI scheme is established, explain the income tax and capital gains tax implications for the employees in respect of the grant and exercise of the options and the sale of the shares, including the availability of entrepreneurs’ relief. (5 marks)

Spike requires advice on the tax implications of share options.

Spike:
– Ceased to trade and sold his unincorporated business to an unrelated individual on 30 September 2012.
– Began working for Set Ltd on 1 May 2013.
– Has no income or capital gains other than the amounts referred to in the information below.

Remuneration from Set Ltd:
– Spike is being paid a salary of £65,000 per year.
– On 1 May 2013, Spike was granted an option to purchase ordinary shares in Set Ltd.

The option to purchase ordinary shares in Set Ltd:
– Spike paid £3,500 for an option to purchase 7,000 ordinary shares, representing a 3·5% shareholding.
– The option is exercisable on 1 May 2017 at £4·00 per share.
– An ordinary share in Set Ltd was worth £5·00 on 1 May 2013 and is expected to be worth £8·00 on 1 May 2017.
– Set Ltd does not have any HM Revenue and Customs approved share option schemes.

Required:
(b) (i) Explain all of the income tax and capital gains tax liabilities arising on Spike in respect of the grant and the exercise of the share options and the eventual sale of the shares in Set Ltd; (4 marks)