CG56321 - Shares and securities: employee share schemes: employment-related securities: acquisition consideration
When an asset is acquired by reason of employment, the market value rule (see section 17(1) of the Taxation of Chargeable Gains Act 1992 (TCGA) 1992), 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) TCGA 1992 does not disapply section 17(1) TCGA 1992 and the employee is treated as having acquired the shares at market value.
The market value rule in section 17(1) TCGA 1992 is 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 of the Income Tax (Earnings and Pensions) Act (ITEPA) 2003 was introduced by Finance Act 2003. You will need to consider not only the nature of the asset being disposed of but also when it was acquired.
Section 149AA TCGA 1992 prevents the market value rule applying to the acquisition of restricted or convertible 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 TCGA 1992 (see CG56328)).
Section 149AA TCGA 1992 does not apply to the person from whom the shares are acquired.
Options
Grant of an option
Section 149A TCGA 1992 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 section 288(1A) TCGA 1992). A "securities option" is defined at section 420(8) ITEPA 2003 and may encompass rights or opportunities that would not otherwise be options.
Exercise of an option
From 15 April 2003 the acquisition of securities pursuant to an employment-related securities option is treated for the purposes of the TCGA 1992 as it were the exercise of an option (see section 288(1A) TCGA 1992 and CG56302).