CG56341 - Employment-related securities: employee: employment income: restricted securities: example
Throughout this manual, all legislative references are to the Taxation of Chargeable Gains Act 1992 (TCGA 1992) unless otherwise stated.
The effect of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) rules and S149AA Taxation of Chargeable Gains Act 1992 (TCGA 1992) can be to create a larger loss for Capital Gains Tax purposes than would otherwise be the case.
Y receives 1000 shares in his employing company. Their initial actual market value was agreed at 70pps and the unrestricted market value was £1ps. He did not sign an election.
When the restriction is lifted the shares' market value is now only 60pps - less than when Y received them.
- The amount which constitutes earnings of Y on acquisition is based on 70% of the unrestricted market value (70% of £1 is 70p),
- when the restrictions are removed the amount which counts as income of Y is 30% of whatever the market value is at that time (30% of 60p= 18p)
So, if Y immediately sells the shares for 60p per share, the difference between the market value on acquisition, £700, and the sale proceeds is £100. But overall Y has employment income £880 and there is an allowable capital loss £280: