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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Employment-related securities: employee: employment income: restricted securities: examples

An employee and employer may elect to ignore restrictions for the purpose of calculating amounts counting as income in respect of restricted (including forfeitable) employment-related securities. It is thus possible that two employees receiving the same number of shares in the same employer will have different amounts counting as income to add to the acquisition costs in accordance with s119A TCGA.

An election to ignore restrictions will also result in any further appreciation in the value of the shares being assessed to Capital Gains Tax and not treated as income.

Example 1

On 1 December 2012 X is given some shares in the company that he works for. They cannot be sold for three years. When he receives the shares they have an unrestricted value of £1,000 but a restricted value (taking account of the fact that they cannot be sold for three years) of only £800. At the three-year point when the restrictions come to an end the unrestricted market value has risen to £1400. X immediately then sells the shares for £1400. He incurs no incidental costs of disposal.

When the shares are received, as nothing is paid, the full restricted value of the shares, £800, constitutes earnings. The uncharged proportion of their unrestricted value is 20%.

At the three-year point, when the shares become unrestricted, an amount counts as employment income based on the market value of the shares at that time, on the untaxed proportion. Thus, when the restriction comes to an end, the amount which then counts as employment income is 20% of the market value, £1400: £280.

Overall, X has employment income £1080.

For capital gains purposes the cost of the shares is given by S149AA TCGA92 with S119A, see CG56328.

Sale Proceeds   £1400
     
Amount paid to employer £0  
Amount that constituted earnings on acquisition £800  
Amount counting as income, S119A TCGA92 and S426 ITEPA03 £280 £1080
Chargeable Gain   £320

Example 2

In the example above X and his employer jointly elect to ignore the restriction.

The amount that constitutes earnings on receipt of the shares is now based on the unrestricted market value of £1,000 and there is no further amount counting as income when the restriction comes to an end.

Overall, X has employment income £1000.

For capital gains purposes the cost of the shares is again given by S149AA TCGA92 with S119A, see CG56328.

Sale Proceeds   £1400
     
Amount paid to employer £0  
Amount that constituted earnings on acquisition £1000  
Amount counting as income, S119A TCGA and S426 ITEPA03 £0 £1000
Chargeable Gain   £400