1. This Revenue and Customs Brief sets out our understanding of the consequences of the transfer of Bradford & Bingley plc into public ownership in relation to the Capital Gains Tax position of former shareholders in Bradford & Bingley plc, and the income tax and Capital Gains Tax position of those who held shares and share options under employee share schemes.
2. Sections 3 and 4 of The Banking (Special Provisions) Act 2008 give powers for the Treasury to order the transfer of securities issued by an authorised UK deposit-taker and powers for extinguishing rights to subscribe for, or otherwise acquire, securities of the deposit-taker in question. The powers in sections 3 and 4 were exercised in the Bradford & Bingley plc Transfer of Securities and Property etc Order 2008 ('the Transfer Order') (Statutory Instrument 2008 No 2546) The Transfer Order came into force on 29 September 2008.
4. Under Article 3 of the Transfer Order the ordinary shares in Bradford & Bingley plc were transferred to the Treasury. Under Article 5 of the Transfer Order rights (or other entitlement) to receive shares in the company (whether by subscription, conversion or otherwise) were extinguished. The rights which were extinguished include rights granted by reason of, or in connection with, a person's office or employment with Bradford & Bingley plc or any of its UK subsidiary companies.
5. The Treasury has also made an order for a scheme for compensation for the transfer of shares and extinguishing of rights to receive shares. The Bradford & Bingley plc Compensation Scheme Order 2008 (Statutory Instrument 2008 No 3249) was made on 18 December 2008 and came into force on 19 December. On 10 March 2009, the Treasury invited applications for the position of independent valuer to assess any compensation that may be payable. It is hoped that the valuer will be appointed and begin work in the middle of the year. Further details can be found on the Treasury website.
6. We consider that the entire loss to the shareholder of his or her shares under the Transfer Order is an occasion of disposal under section 24(1) of the Taxation of Chargeable Gains Act 1992 ('TCGA'). The time of the disposal will be 29 September 2008, the date the Transfer Order came into force, which falls in the tax year 2008-09.
7. As no consideration was received for the shares, the disposal on 29 September will normally give rise to a loss in respect of any allowable costs of acquisition, but shareholders who are entitled to receive a payment under the Compensation Scheme Order should see paragraph 9 below. Where the disposal includes 'free' shares received by the same holder when Bradford & Bingley demutualised, 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.
8. Losses arising under section 24(1) TCGA can be set against chargeable gains in the usual way. The latest date for claiming losses arising in 2008-09 is 31 January 2015.
9. Any payment under the Compensation Scheme Order will be chargeable to Capital Gains Tax under section 22(1)(a) TCGA as a capital sum derived from the recipient's former shareholding. The charge to Capital Gains Tax will arise in the tax year in which the compensation is received. Where a former shareholder has not claimed a capital loss under section 24(1) TCGA, see paragraphs 6 to 8 above, any allowable costs incurred in acquiring the shares may be deducted from the compensation in arriving at the gain arising under section 22(1)(a) TCGA.
10. For shares and share options held by employees under employee share schemes, there may be income tax consequences.
11. Employees with a savings contract under the Save As You Earn (SAYE) scheme, also known as 'Sharesave', 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.
12. As a separate matter, if any compensation is received from the Government for extinguishing of rights to receive shares (see paragraph 6 above), 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 section 477 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) in the tax year in which the compensation is received.
13. As no consideration was received when shares were taken into public ownership on 29 September 2008, there is no 'chargeable event' under section 427(3) ITEPA and therefore no charge to income tax in 2008-09.
14. As no consideration was received for the shares, for capital gains purposes the disposal on 29 September will normally give rise to a loss in respect of any allowable costs of acquisition, but shareholders who are entitled to receive a payment under the Compensation Scheme Order should see paragraph 9 above.
15. 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 section 447 ITEPA in the tax year in which the compensation is received.
16. Since Bradford & Bingley shares were not tradeable immediately before they were disposed of in September 2008, we consider they are not Readily Convertible Assets (RCA) under section 702(1)(a) ITEPA. Furthermore, they would have been 'corporation tax deductible' under Schedule 23 Finance Act 2003, and are therefore not treated as RCA by Section 702(5A) ITEPA. Therefore, PAYE will not be operable and the employment income should be returned by the employee via the Self Assessment process.
Issued 2 April 2009.