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Transitional rules

The current ESS rules generally start from 29 September 2018. However, ESS are often long-term arrangements and there may be arrangements that were offered before the current rules applied. There are transitional rules for some benefits under these arrangements as follows.

The previous tax rules continue to apply and the current ESS rules do not apply to:

  • Shares granted or acquired under the ESS before 29 September 2018, as long as the shares were not granted or acquired with a purpose of avoiding the application of the current ESS rules and the share scheme taxing date for the shares under the current ESS rules is before 1 April 2022.
  • Shares granted or acquired under the ESS before 12 May 2016 (which was when proposals for reform of the ESS rules were published).

If the previous ESS rules apply, benefits may still be taxable and the employer still has reporting obligations. However, the way the benefit is calculated and its timing may be different.

Example: Artisan Coffee Co transferred shares on 1 April 2016

Artisan Coffee Co transfers shares on 1 April 2016  to a trustee on trust for an employee. The shares are then transferred to the employee if the employee remains employed by Artisan Coffee Co after three years (31 March 2019). The benefit will continue to be taxed under the past ESS rules because the shares were granted under the ESS on 1 April 2016 ( ie before 12 May 2016).

Example: Artisan Coffee Co transfers shares on 1 April 2017

Artisan Coffee Co transfers shares on 1 April 2017 to a trustee on trust for an employee. If the employee leaves the company for any reason during the next three years, the shares are forfeited for no consideration. After three years (31 March 2020), if the employee remains employed by Artisan Coffee Co the shares are transferred to the employee.

There is a material risk that the employee could leave the company for any reason (for example health reasons, an alternative job offer) so the share scheme taxing date is when the 3 year period is complete.

As the shares were granted on 1 April 2017 (before 29 September 2018) and the share scheme taxing date under the current ESS rules is 31 March 2020 (ie before 1 April 2022), as long as the shares were not granted with a purpose of avoiding the application of the current ESS rules the benefit will continue to be taxed under the past ESS rules.

Example: Artisan Coffee Co granted an option on 1 April 2017

If instead Artisan Coffee Co granted an option to the employee on 1 April 2017 that the employee can exercise to acquire shares if they remain employed by Artisan Coffee Co after three years (31 March 2020), the transitional provisions will not apply and the benefit will be taxed under the current ESS rules.

The transitional rules generally do not apply in respect of option schemes. Under these schemes, shares are not granted or acquired until the option is exercised by the employee.