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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Employment-related securities: public offers

TCGA92/S149C

Employees in a company may acquire shares in connection with an offer to the public, for example when the company is floated on the Stock Exchange. It is common for employees to be offered shares on special terms when a company makes an offer of shares to the public: for example, they may be given free shares, or allowed to buy shares at a discount to the public offer price. They may also be offered priority allocations of shares, so that if an offer is oversubscribed and applications from members of the public are scaled down or not met, the employee’s priority rights may ensure that they are not affected, or are affected less than members of the public.

Employer

If the offer is for an issue of new shares by the employer, there will be no liability in respect of capital gains on the employer. An issue of shares by a company is not a disposal of those shares by the company.

If the offer is for a transfer of existing shares, there will be a disposal of the shares by the person transferring them to the employee. The transfer will be in connection with the employment. In these circumstances, the disposal will be deemed to be at market value, by TCGA92/S17 (1).

Employee

TCGA92/S149C prevents the market value rule, TCGA/S17 (1), from applying to the employee’s acquisition of the shares if the terms of the offer to employees are such that there is no charge to Income Tax under Part 7 Chapter 10 ITEPA 03. The acquisition cost of the shares to the employee will thus be the amount they actually pay.

If the terms of the offer to employees are such that there is no Income Tax exemption the acquisition cost of the shares by the employee is the open market value of the shares at the date of acquisition.

If there is no Income Tax exemption, there may, by reference to the value of the shares acquired, be an amount which constitutes earnings under normal principles of S62 ITEPA03. Any amounts on which liability arises under S62 ITEPA03 are not taken into account in computing the cost of the shares to the employee for Capital Gain Tax purposes.

As for other employment-related shares, various amounts counting as employment income might possibly arise, see CG56328-9, following an employee’s acquisition of shares through a public offer and be added to the employee’s acquisition cost in computing a gain on a subsequent disposal.

Section 149C was introduced into the TCGA92 by ITEPA03. Previously the disapplication of the market value rule in relation to shares offered to employees on special terms rested on Section 68(4) FA88.