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HMRC have published a note setting out their understanding of the consequences of the transfer of Northern Rock plc into temporary public ownership.
The information is in relation to the capital gains tax position of former shareholders in the bank, and the income tax and CGT position of those who held shares and share options under employee share schemes.
With regard to CGT, HMRC consider the entire loss to the shareholder of his or her shares under the transfer order to be an occasion of disposal under of TCGA 1992, s 24(1).
The time of the disposal will be 22 February 2008, the date the transfer order came into force, which falls in the tax year 2007-2008.
As no consideration was received for the shares, the disposal on 22 February will normally give rise to a loss in respect of any allowable costs of acquisition.
Where the disposal includes 'free' shares received by the same holder when Northern Rock demutualised in 1997, those shares will not have any cost for capital gains purposes.
Further information on the tax treatment of free shares is contained in Inland Revenue Tax Bulletin 34.
Losses can be set against chargeable gains in the usual way.
Any payment under the compensation scheme order will be chargeable to capital gains tax under s 22(1)(a) as a capital sum derived from the recipient's former shareholding.
The charge will arise in the tax year in which the compensation is received. Where a former shareholder has not claimed a capital loss under s 24(1), any allowable costs incurred in acquiring the shares may be deducted from the compensation in arriving at the gain.
Employees with a savings contract under the save as you earn may choose to continue paying monthly contributions into their savings scheme.
When the three-year or five-year contract expires, they can receive their savings with a tax-free bonus. They will no longer have an opportunity to exercise an option and buy shares at the end of the contract.
As a separate matter, if any compensation is received from the Government for extinguishing of rights to receive shares, the compensation is likely to be the receipt of a benefit in connection with the SAYE options, so the amount of the benefit will count as employment income under ITEPA 2003, s 77 in the tax year in which the compensation is received.
Any shares held in a share incentive plan were transferred into public ownership on 22 February under the transfer order. A loss will arise for CGT purposes, as explained above.
Any compensation received from the Government will be chargeable to capital gains tax for the tax year in which it is received.
It will no longer be possible to exercise any options acquired under a company share option plan and receive shares in Northern Rock.
If any compensation is received from the Government for extinguishing of rights to receive shares, this compensation is likely to be the receipt of a benefit in connection with the CSOP options, so the amount of the benefit will count as employment income under ITEPA 2003, s 477 in the tax year in which the compensation is received.
Turning to restricted shares within ITEPA, Chapter 2, as no consideration was received when shares were taken into public ownership on 22 February 2008, there is no 'chargeable event' under s 427(3) and therefore no charge to income tax in 2007-08.
As no consideration was received for the shares, for capital gains purposes the disposal on 22 February will normally give rise to a loss in respect of any allowable costs of acquisition.
Any compensation received from the Government in connection with employment-related securities is likely to be the receipt of a benefit in connection with those employment-related securities.
The amount of the benefit, to be determined on the facts of each case, will count as employment income under s 447 in the tax year in which the compensation is received.
Since Northern Rock shares were not tradeable immediately before they were disposed of in February 2008, HMRC consider they are not readily convertible assets under s 702(1)(a).
Furthermore, they would have been 'corporation tax deductible' under FA 2003, Sch 23 and are therefore not treated as readily convertible assets by ITEPA 2003, s 702(5A). Therefore, PAYE will not be operable and the employment income should be returned by the employee via the self assessment process.
In related news, for circumstances in which an individual died in the period 22 February 2007 to 21 February 2008 (inclusive) while owning shares in Northern Rock, and the shares were subsequently taken into temporary public ownership before they were either sold by the personal representatives or transferred to the person(s) entitled under the deceased's will or intestacy, the shares will be treated as if they had been cancelled as at 22 February 2008, for the purposes only of IHTA 1984, s 186A.
Provided the other conditions of s 186A are met, a claim to relief under those provisions may be made by the appropriate person.
