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HMRC internal manual

Employment Income Manual

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Employment income provided through third parties: exclusions: priority of Part 7 ITEPA 2003 over Part 7A rules

Section 554N ITEPA 2003

Acquisition of forfeitable securities
Acquisition of employment-related securities option
Acquisition of employment-related securities option: example
Charges under Part 7 ITEPA 2003

In certain circumstances, Section 554N gives Part 7 ITEPA 2003 (employment-related securities) priority over the Part 7A rules. This overrides the general rule that Part 7A takes priority.

In summary, where Part 7 applies because employment-related securities or securities options have been acquired within the terms of Part 7 (see ERSM20100), then the Part 7 rules apply instead of the Part 7A rules.

On Part 7, see the Employment-Related Securities Manual.

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Acquisition of forfeitable securities

Under Section 554N(1), a relevant step does not give rise to Part 7A income if:

  • the subject of the step is employment-related securities,
  • a person acquires the securities by virtue of the step, and
  • Section 425(2) ITEPA 2003 (forfeitable securities: tax exemption on acquisition) applies to the acquisition, or would apply but for Section 421E(1) ITEPA 2003 (exclusion: residence).

Section 554N may also cover a relevant step taken after the acquisition. See EIM45330.

But there are other types of restricted securities to which Section 425(2) ITEPA 2003 does not apply, namely:

  • those without a forfeiture provision, and
  • those with a forfeiture provision that lasts more than five years.

Section 554N does not apply to such securities.

On restricted securities generally, see ERSM30300.

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Acquisition of employment-related securities option

Under Section 554N(2), a relevant step does not give rise to Part 7A income if:

  • the subject of the step is an employment-related securities option,
  • a person acquires the option by virtue of the step, and
  • Section 475(1) ITEPA 2003 (tax relief on acquisition of option) applies to the acquisition, or would apply but for Section474(1) ITEPA 2003 (exclusion: residence).

Section 554N may also cover a relevant step taken after the acquisition. See EIM45330.

Note that the grant of an option does not in itself automatically mean that securities have been earmarked to satisfy the option. The earmarking of securities is a separate relevant step.

Note also that the Section 554N(2) exclusion only applies to the acquisition of the option. It does not apply to the earmarking of securities even if the option is acquired and the securities are earmarked at the same time.

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Acquisition of employment-related securities option: example

An EBT holds 100 shares in employer company B PLC. It grants an option over B PLC shares to employee A which is fully vested and exercisable at any time before the tenth anniversary of the grant date.

Under Section 554N(2), a relevant step does not give rise to Part 7A income if, by virtue of the step, A acquires an employment-related securities option to which Section 475(1) ITEPA 2003 applies.

Here A has acquired an employment-related securities option and Section 554N(2) stops this acquisition from giving rise to Part 7A income.

Suppose the EBT earmarks B PLC shares that it holds with a view to later providing them to A to satisfy the exercise of the option. Section 554N(2) does not stop the earmarking from giving rise to Part 7A income. On earmarking, see EIM45095 onwards.

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Charges under Part 7 ITEPA 2003

Under Section 554N(4) and (5), a relevant step does not give rise to Part 7A income if it is one of the events listed below.

  • A chargeable event for the purposes of Section 426 ITEPA 2003 (restricted securities: charge on post-acquisition chargeable events).
  • A chargeable event for the purposes of Section 438 ITEPA 2003 (convertible securities: charge on post-acquisition chargeable events).
  • An event which gives rise to the discharge of a notional loan for the purposes of Section 446U ITEPA 2003 (securities acquired for less than market value: discharge of notional loan).
  • A chargeable event for the purposes of Section 476 ITEPA 2003 (securities options: charge on post-acquisition chargeable events).
  • A disposal to which Part 7 Chapter 3D ITEPA 2003 applies (securities disposed of for more than market value).

Under Section 554N(6), a relevant step also does not give rise to Part 7A income if it would be one of the events listed above but for one of the provisions listed below.

  • Section 421B(6) ITEPA 2003 (Part 7 Chapters 2 to 4A of that Act disapplied by death of employee).
  • Section 421E(1) ITEPA 2003 (restricted and convertible securities: exclusion: residence).
  • Section 429 ITEPA 2003 (restricted securities: disapplication of Section 426 charge).
  • Election under Section 430 ITEPA 2003 (restricted securities: election for outstanding restrictions to be ignored).
  • Election under Section 431 ITEPA 2003 (restricted securities: election for disapplication of Part 7 Chapter 2 ITEPA 2003).
  • Section 443 ITEPA 2003 (convertible securities: disapplication of Section 438 charge).
  • Section 474(1) ITEPA 2003 (securities options: exclusion: residence).
  • Section 477(2) ITEPA 2003 (securities options: charge disapplied by death of employee).