CG56342 - Employment-related securities: employee: employment income: convertible securities

Throughout this manual, all legislative references are to the Taxation of Chargeable Gains Act 1992 (TCGA 1992) unless otherwise stated.

S149AA of the Taxation of Chargeable Gains Act 1992 (TCGA 1992)

S149AA TCGA 1992 prevents the market value rule applying to the acquisition of convertible employment-related securities. See CG56321. The acquisition cost for capital gains purposes is instead built up from the actual cost and amounts chargeable to Income Tax.

Section 437 Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) provides that for the purposes of any liability to Income Tax in respect of earnings under Section 62 ITEPA 2003 the market value of convertible employment-related securities is normally to be determined as if they were not convertible. Thus, if the employee's acquisition cost for capital gains purposes were to be market value, there could be a mismatch. (See CG56337.)

The capital gains acquisition cost of convertible employment-related securities acquired on or after 1 September 2003 is, by S149AA TCGA 1992

  • their actual cost at the date of acquisition together with
  • any amount which constituted earnings in respect of their acquisition under s62 ITEPA 2003 (for disposals after 11 March 2008 exempt income is ignored. For disposals after 5 April 2015 earnings which were not charged to UK tax, but which would have been exempt if they had been, are also ignored) and
  • amounts counting as income under S438 on a conversion under S439(3)(a) Chapter 3 Part 7 ITEPA 2003. See S119A TCGA 1992and CG56328-9.

In the case of shares which on acquisition became employee shareholder shares (see CG56705P) the consideration for the acquisition is (subject to the operation of s119A) equal to the amount that constituted earnings under s62 or s226A ITEP 2003 and no other consideration is treated as having been given for the acquisition of the shares.