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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Employment-related securities: acquisition consideration

When an asset is acquired by reason of employment, the market value rule, TCGA92/S17 (1), applies unless it is displaced by other legislation.

If a company issues shares to an employee there is no disposal of those shares by the company. However, it is to be expected in this situation that, whatever consideration may actually have been given by the employee, the value of their services (past, present and future) increases that consideration to the market value. Accordingly, Section 17(2) does not disapply Section 17(1) and the employee is treated as having acquired the shares at market value.

The market value rule, TCGA92/S17 (1), if it would otherwise be in point, is specifically disapplied in relation to the acquisition of certain types of employment-related security. Legislation has changed over time and the broad definition of “securities” in Section 420 ITPA03 was introduced by FA03. You will need to consider not only the nature of the asset being disposed of but also when it was acquired.

 

Risk of Forfeiture

For shares subject to the risk of forfeiture, TCGA92/S149B provides that Section 17(1) shall not apply and that the acquisition consideration is to be taken to be the actual amount or value paid for those shares (subject to any addition required under Section 120, see CG56329). This applies to employees acquiring such shares after 16 March 1998 and before the 1 September 2003. TCGA92/S149B does not apply to the person from whom the shares are acquired.

TCGA92/S149AA prevents the market value rule applying to the acquisition of restricted employment-related securities (including securities subject to risk of forfeiture) on or after 1 September 2003. TCGA92/S149AA does not apply to the person from whom the shares are acquired.

Restricted

TCGA92/S149AA prevents the market value rule applying to the acquisition of restricted employment-related securities (including securities subject to risk of forfeiture) on or after 1 September 2003. The acquisition consideration is thus the actual amount or value paid for those shares (subject to any addition required under Section 119A, see CG56328).

TCGA92/S149AA does not apply to the person from whom the shares are acquired.

Convertible

TCGA92/S149AA prevents the market value rule applying to the acquisition of convertible employment-related securities on or after 1 September 2003. The acquisition consideration is thus the actual amount or value paid for those shares (subject to any addition required under Section 119A, see CG56328).

TCGA92/S149AA does not apply to the person from whom the shares are acquired.

Option

Grant of option

TCGA92/S149A restricts both the cost to the employee and the disposal proceeds of the person granting the option to any amount actually paid for the grant of an employee share option (where this grant takes place after 27 November 1995). It extends to employment related securities options granted after 15 April 2003. (See TCGA92/S288(1A)). A “Securities option” is defined at Section 420(8) ITEPA03 and may encompass rights or opportunities that would not otherwise be options.

Exercise of option

TCGA92/S144ZA provides that TCGA92/S17 (1) does not apply to either the employee or the person from whom the shares are acquired on the exercise of an option by an employee after 9 April 2003. See CG12397. The employee’s acquisition consideration is thus the actual amount or value paid for those shares (subject to any addition required under Section 119A, see CG56328).

From 15 April 2003 the acquisition of securities pursuant to an employment-related securities option is treated for the purposes of the TCGA as it were the exercise of an option. See TCGA92/S288(1A) and CG56302.

Where an employee exercised an employee share option before 10 April 2003, the market value rule applies (Mansworth v Jelley, see CG12396 and CG56321A+). You disregard the acquisition of the option and treat the shares as acquired at their market value at the date the option was exercised. See CG56321A.