§ Mr. Tugendhat
asked the Chancellor of the Exchequer if he will make a statement about the operation of Section 79 and Schedule 12 of the Finance Act, 1972, in relation to restrictions attaching to shares.
§ Mr. Patrick Jenkin
Yes. Section 79(2)(c), Finance Act, 1972, exempts from 102W any charge to tax under Section 79(4) any acquisitions of shares which inter alia were not subject to any restriction other than restrictions attaching to all shares of the same class. Such restrictions usually take the form of the shares concerned being deprived of dividend or voting rights, or being subject to restrictions as to transfer. The Inland Revenue is advised that where such restrictions are imposed as a condition of a loan granted to employees in order that they may acquire shares under a share incentive scheme the shares may not be subject to restrictions within the meaning of Section 79(2)(c). In such cases the restrictions will not reduce the value of the shares and an employee who acquires them at less than market value will be liable to income tax on the difference; but unless the shares are of a special class, subsequent increases in their value will not be subject to income tax whether or not the scheme is approved by the Inland Revenue.
The intention of the legislation was to allow shares to be acquired under an approved share incentive scheme at not less than 80 per cent. of the market value of unrestricted shares, without income tax liability being incurred, if the scheme imposed appropriate restrictions; but to charge income tax on increases in the value of shares acquired under unapproved arrangements if any special restrictions were imposed.
I propose to include in next year's Finance Bill provision to ensure that any restrictions on the rights of a participant in a share option or incentive scheme or on the exercise of those rights, however imposed and whether or not they reduce the value of the shares, are treated as restrictions attaching to the shares for the purposes of Section 79 and Schedule 12, Finance Act, 1972. The legislation will apply to shares acquired after today. It will not affect purchases of shares, other than shares of a special class, by individuals as directors and employees that are financed by means of loans which are independently arranged.