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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Employee share schemes: introduction

Employers commonly use shares and other securities to reward, encourage and retain employees and can arrange for shares or other securities to be acquired by their employees in a number of ways. For example:

  • the employee may be allowed to acquire them at less than market value;


  • the employee may be given them for no payment;


  • the employee may be granted an option to acquire them at a future date.

The shares or other securities will generally be in a company for which the employee works, or another group company.

Before being allowed to acquire the shares or other securities the employee may have to meet conditions or targets. Or they might, for example, acquire the shares or other securities subject to restrictions, possibly including the risk of forfeiture, that may later be removed.

Arrangements can be very varied. At one extreme, the arrangements may be entirely informal and there may be no scheme documentation at all. At the other extreme shares or share options may be offered under a formal employee share scheme which has been approved by HMRC.

Different arrangements may have different Income and Capital Gains Tax consequences for the employee and the employer’s tax liability may also be affected. You need to consider the Income Tax treatment of a transaction involving employment-related securities first.

Part 7 ITEPA03 contains special Income Tax rules about cases where securities or options are acquired in connection with an employment. ITEPA03 consolidated the previous income tax rules for employee share schemes and included some consequential changes for Capital Gains Tax. Finance Act 2003 then introduced numerous changes to the Income Tax treatment of employment-related securities and options and again made consequential changes to TCGA92.

The guidance in this manual is written primarily in terms of the legislation following the introduction of FA03 and, where reference is made to earlier legislation, that applicable to shares acquired after 25 October 1987. On a disposal of employment-related shares or securities acquired before the Finance Act 2003 came into force you will need to consider what amounts of employment income may have arisen under earlier provisions and their potential impact on the capital gains computation. There is a table showing the legislative history of the Income Tax provisions at ERSM10070.