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HMRC internal manual

Business Income Manual

Specific deductions: employee share schemes: providing shares to employees: qualifying shares: restricted shares

S1011, S1019, S1025-S1029 Corporation Tax Act 2009, Sch23 Part4 Finance Act 2003 (as originally enacted)

Restricted shares fall into two main categories:

  • forfeitable shares: these are shares which are subject to restrictions which may result in the employee having to forfeit the shares for less than their market value for reasons other than cessation of employment due to misconduct;
  • other restricted shares: for example where there are restrictions on:

    • rights conferred by the shares (such as restrictions on voting or rights to dividends), or
    • the ability to sell or retain the shares (such as being prohibited from selling the shares for a fixed period).

Deductions for qualifying shares which are restricted shares are aligned with the timing and amounts on which the employee is chargeable to tax as employment income (or, for shares acquired through a tax-advantaged EMI option, would be chargeable but for an exemption from tax).

There are three categories of ‘relief-triggering’ events. The events, and the deductions given for the periods in which they occur, are:

Relief-triggering event Amount of deduction
Acquisition of shares by employee The amount taxable as employment income in respect of the acquisition
Lifting or variation of restrictions, or selling the shares with restrictions still attached The amount taxable as employment income under S426 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)
Death of employee while shares still subject to restrictions The amount which would have been taxable as employment income under S426 ITEPA 2003 if the shares had been sold (with restrictions attached) immediately before death

Employment Income Tax charges

The general rule for restricted shares other than forfeitable shares is that there is an Income Tax charge in respect of the acquisition of the shares based on the market value of the shares at that time, taking into account the effect of the restrictions.

For forfeitable shares the general rule is that there is no Income Tax (or NICs) charge in respect of the acquisition of the shares. Exceptions are if:

  • there is a risk of forfeiture which lasts for five years or more; or
  • the share acquisitions arise from existing rights (for example by exercising a share option); or
  • an election is made (under S425 ITEPA 2003) for the employee to pay tax on the value of the shares on acquisition, taking into account the effect of the restrictions.

For both forfeitable and other restricted shares, an election (signed by employer and employee) may be made when the shares are acquired for Income Tax to be paid at that time, based on the value of the shares excluding the effect of the restrictions (under S431 ITEPA 2003).

If such an election is not made, each time a restriction is lifted or varied there is an Income Tax (and NICs) charge based on the market value of the discount relating to that restriction. The discount relating to a restriction represents the proportion of the shares’ value that was not taxable on acquisition.

The amount chargeable to Income Tax is calculated using a formula. An Excel-based calculator to help with the relevant Income Tax computations is available on request (by e-mail) from the Employee Shares and Securities Unit.

In the simplest case (where there is only one restriction) the amount chargeable to income tax is equal to the restriction’s effect on the market value of the shares at the time it is lifted. The result is that the employee is taxed on the whole share in two stages:

  • an amount at acquisition relating to the unrestricted portion of the share, and
  • the balance when the restriction is lifted.

By focusing on proportions of the shares’ market value at each event, the capital growth on previously taxed proportions is not included in the computation of the amount of the gain chargeable to income tax.

Forfeitable shares acquired before 16 April 2003

The qualifying shares rules were introduced with effect for accounting periods beginning on or after 1 January 2003 and originally included special rules for ‘forfeitable shares’ but not for other restricted shares. Exceptionally, you may have to deal with a case to which the original special rules apply. For forfeitable shares acquired before 16 April 2003:

  • no deduction is given for the period in which the employees acquire the shares (the ‘acquisition period’), even if an employment Income Tax charge arises in respect of the acquisition;
  • a deduction is given for the ‘post-acquisition’ period in which the risk of forfeiture expires or is lifted (or, if earlier, when the employee disposes of the shares or dies).

The amount of the deduction given for the relevant post-acquisition period is equal to:

  • the market value of the shares at the date of the relevant relief-triggering event,


  • any consideration given by the recipient for the shares, or for any option to acquire them, or for the removal of the risk of forfeiture.

Market value for this purpose means the price that the shares might reasonably be expected to fetch on a sale in the open market.

The consideration given by the employee does not include services provided by the employee in performing the duties of their employment with the employing company.


The examples at BIM44390 explain the employment Income Tax charges, and related Corporation Tax deductions in respect of restricted shares.