Section 114 Finance Act 1990

Here’s a breakdown of Section 114 of the Finance Act 1990, formatted in HTML:

Section 114 of the Finance Act 1990 in the United Kingdom introduced significant changes relating to the tax treatment of company share option schemes. Prior to this Act, the taxation of such schemes was often complex and could be unpredictable for both employees and employers. Section 114 aimed to simplify the landscape and provide a clearer framework for the taxation of approved share option schemes.

The core purpose of this section was to offer tax advantages to employees participating in approved schemes, thereby incentivizing them to contribute to the company’s success. These advantages typically manifested as deferral of income tax and National Insurance contributions (NICs) until the point when the options were exercised and the shares were sold. This deferral could be a significant benefit, particularly if the share price had increased substantially between the grant of the option and its eventual exercise.

However, this preferential treatment was not automatic. To qualify for the tax benefits under Section 114, the share option scheme had to meet specific criteria and gain approval from the Inland Revenue (now HMRC). The legislation laid out the conditions for approval, which generally included provisions relating to the types of shares that could be included in the scheme, the price at which options could be granted, and the overall structure of the scheme. These conditions aimed to ensure that the schemes were genuinely designed to motivate employees and not simply vehicles for tax avoidance.

One key aspect of Section 114 was the requirement that options be granted at market value. This meant that the option price could not be set below the fair market value of the shares at the time the option was granted. This rule was intended to prevent schemes from effectively gifting value to employees, which would have undermined the rationale for the tax advantages.

The section also addressed the potential for abuse by stipulating that certain conditions had to be met even after the scheme was approved. For example, if an employee ceased to be employed by the company within a certain timeframe after receiving the option, the tax advantages could be clawed back. Similarly, if the terms of the scheme were altered in a way that no longer met the approval criteria, the tax benefits could be jeopardized.

Furthermore, Section 114 provided clarity on the tax treatment of gains made when the shares acquired through the exercise of the options were eventually sold. Any gain made between the exercise price and the sale price would be subject to Capital Gains Tax (CGT), not income tax. This was a further tax advantage, as CGT rates were often lower than income tax rates.

In summary, Section 114 of the Finance Act 1990 sought to encourage employee participation in company share ownership by offering tax benefits through approved share option schemes. It provided a framework for these schemes, outlining the conditions for approval and the tax treatment of both the grant and exercise of options, and the eventual disposal of shares. While later legislation has modified and updated the rules relating to share option schemes, Section 114 laid the groundwork for the modern system of tax-advantaged employee share ownership in the UK.