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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

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Enterprise Management Incentives (EMI): Taxation of EMI options: Effect of section 431 election on discounted options over restricted shares - example

Example of the tax charge on exercise of discounted options over restricted shares

C is granted an option to acquire 20,000 shares

The actual market value (AMV) of each share at the date of grant is £1.

The unrestricted market value (UMV) of each share at the date of grant is £1.50

The option exercise price is 60p

The actual market value (AMV) of each share at the date of exercise is 80p.

The unrestricted market value (UMV) of each share at the date of exercise is £1.20

The taxable amount without a section 431 election is:

(£0.80 - £0.60) x 20,000 = £4,000

The taxable amount with a section 431 election is:

(£1.00 - £0.60) x 20,000 = £8,000

With a section 431 election (ERSM30450) the taxable amount will be increased but there will be no further charge to tax when the restrictions are lifted. See ERSM30420 for a calculation of the tax charge when the restrictions are lifted.

If a section 431 election (ERSM30450) is made when restricted shares are acquired at a discount, the tax charge is only affected by the election if the shares have decreased in value between the date of grant and exercise. This is because the “chargeable market value” is the lower of the market value at the date of grant and the market value at the date of exercise.

The section 431 election (ERSM30450) substitutes UMV for AMV at the date of exercise, but the market value at the date of exercise is not used in the calculation unless it is lower than the market value at the date of grant.