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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Employment-related securities: amounts counting as employment income: ITEPA03


TCGA92/S119A has the effect of stopping the same value difference being subject to both Income Tax and Capital Gains Tax. The section identifies certain events that may result in an amount counting as employment income in relation to employment-related securities. Subsequently, in the computation of a chargeable gain or allowable loss accruing on a disposal of the securities, an amount which has counted as employment income before or on the occasion of the disposal may fall to be treated as part of the consideration given for the acquisition of the asset. This will lead to a smaller chargeable gain than would otherwise have accrued. It may also have the effect of augmenting or creating an allowable capital loss. (See the example at CG56341.)

In many cases the market value rule, S17(1) TCGA92, does not apply to an employee’s acquisition of employment-related securities. See CG56321. If the rule does apply and there is then also an amount counting as employment income, see CG56321A+.

Amounts may count as employment income of the employee on the securities being acquired or disposed of by the employee. Amounts may also count as his or her income if the securities are acquired or disposed of by an “associated person” as defined in ITEPA03/S421C from or to someone who is not. And amounts counting as income may arise on events which are not a disposal, for example, on the removal of a restriction from shares.

When an individual makes a disposal of an employment-related security, Section 119A may increase the acquisition cost by amounts counting as employment income of another individual and amounts arising on earlier non-disposal events. A security may be treated as an employment-related security after it has ceased to be so for the purposes of ITEPA03 thus permitting an earlier income amount to be taken into account on a disposal, see Section 119A(6).

Not every amount counting as employment income within Part 7 ITEPA will have an impact on the capital gains computation. Section 119A(3) identifies provisions under which relevant income tax charges may arise. These are outlined briefly below.

  • Restricted securities (including forfeitable securities); S426, Chapter 2 Part 7 ITEPA03.
  • Convertible securities; S438 and S439(3)(a), Chapter 3 Part 7 ITEPA03.
  • Discharge of a notional loan; S446U, Chapter 3C Part 7 ITEPA03.
  • Benefit of increase in market value of security; S447, Chapter 4 Part 7 ITEPA03.
  • Income gains on the exercise of securities options; S476, Chapter 5 Part 7 ITEPA03.

For more detail see the Employment Related Securities Manual (ERSM).