There is a new section covering the changes which apply to ESS agreements entered into after 16 March 2016.

The amount of gains on ESS which are exempt from CGT depends on the date of the agreement. If that agreement was entered into on or before 16 March 2016 then the amount of gain that can be exempted (treated as not chargeable under Section 236B Taxation of ChargeableGains Act (TCGA) 1992) is without limit.

However, after that date, then gains treated as exempt are subject to a lifetime limit of £100,000, and amounts above this limit are chargeable gains. HMRC says it is important to note that the critical date is the date the agreement is entered into not when the shares are actually transferred to the employee.

The lifetime limit is per individual, and covers all ESS agreements they have entered into. Once the limit has been reached (ie the individual has realised gains on shares acquired in consideration of an ESS agreement entered into after 16 March 2016 of £100,000) any gains above this amount are chargeable gains.

Changes were also made for transfers to spouses/civil partners of shares acquired in consideration of an employee shareholder share agreement entered into after 16 March 2016.

The rules are that where the market value at the time of transfer would give rise to a gain which is less than the lifetime limit available to the transferor spouse, the transfer is deemed to take place at an amount equal to the market value.

Where the market value at the time of transfer would give rise to a gain which is more than the lifetime limit available to the transferor spouse, the transfer is deemed to take place at an amount which gives rise to a gain equal to the amount of available ESS lifetime limit.

Where the transferor spouse has no ESS lifetime limit available (ie the entire £100,000 has already been ‘used up’ on previous transfers of ESS) the transfer is deemed to take place at an amount which would give rise to neither a gain nor a loss.~

HMRC says that with the introduction of the £100,000 lifetime limit changes were needed to the way employee shares are treated on reorganisation.

When shares acquired through a post 16 March 2016 ESS agreement are exchanged for other shares in a reorganisation, Section 127 TCGA92 will continue to be disapplied (as before) but the following consideration is deemed to be received for the original shares.

This is that if the disposal (using market value) would give rise to a gain which is more than the available ESS lifetime limit, then the transfer is deemed to take place at an amount that gives rise to a gain equal to the available ESS lifetime limit.

If the disposal (using market value) would give rise to a gain which is less than the available ESS lifetime limit, then the transfer is deemed to take place at market value. Where the shareholder has none of their ESS £100,000 lifetime limit available the disposal is deemed to be at a value that would give rise to neither a gain nor a loss. Finally, if the disposal would give rise to a loss, the deemed transfer value is that value which would give rise to neither a gain nor a loss.

An ESS acquired in consideration of an ESS agreement may be exempt only if immediately after its acquisition the total value of ‘qualifying shares’ which have been acquired by the employee does not exceed £50,000.

The limit applies by reference to the total of the values of ‘qualifying shares’ at the times they were acquired. A qualifying share is an ESS in the employer company which entered into the ESS agreement or in an associated company of that company, where the employee acquired the share in consideration of the same ESS agreement, another ESS agreement with the same employer company, or an ESS with an associated company of that employer company.

An ESS is not exempt if, on the date on which the share is acquired, the employee or an individual then connected to the employee has a material interest in the employer company or a parent undertaking of the employer company. Neither is the share exempt if that employee or individual had such an interest at any time in the previous year.

HMRC’s updated guidance contains a number of examples to show how the new rules are designed to work in practice.

The guidance is here