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HMRC internal manual

Employment Income Manual

Employment income through third parties: exclusions: loan to exercise employment-related securities option

Section 554N ITEPA 2003

Section 554N prevents a relevant step within Section 554C(1)(a) from giving rise to Part 7A income if the four conditions in Section 554N(13) are met.

On Section 554C(1)(a), see EIM45060.


These are the four conditions.

  • The relevant step is the payment of a sum of money by way of loan (‘the relevant loan’).
  • The relevant loan is made and used solely for the purpose of enabling A to exercise an ‘employment-related securities option’ (within the meaning of Part 7 Chapter 5 ITEPA 2003). See ERSM110010 onwards.

Note that this condition will not be met if the relevant loan is also:

* made for the purpose of enabling A to pay tax or NIC or both crystallised by the exercise of the option, 
* used for that purpose, or 
* both made and used for that purpose.

Note also that ‘employment-related securities option’ has a wide meaning. For example, it is capable of covering a long term incentive plan under which A will be awarded shares automatically at a future date if specified conditions are met see ERSM110030.

  • A’s exercise of the option gives rise to employment income of A which:

    • is chargeable to income tax (or would be chargeable, but for Section 474 ITEPA 2003 (securities options: cases where Part 7 Chapter 5 does not apply)), or
    • is exempt income (see EIM45455).
  • There is no connection (direct or indirect) between the relevant step and a tax avoidance arrangement. See EIM45855.

On the ‘exercise’ of options, see EIM45460.

Fall-back charge

Under Section 554N(14), there will be a fall-back charge if:

  • this exclusion has prevented a relevant step from giving rise to Part 7A income, and
  • by the end of the period of 40 days starting with the day on which the relevant step is taken, the relevant loan has not been fully repaid.

In such a case, Section 554N(15) deems a relevant step to be taken with the following features.

  • The relevant step is within Section 554C(1)(a).
  • It is taken at the end of the relevant period.
  • The subject of the relevant step is a sum of money of an amount equal to the outstanding amount of the relevant loan as at the end of the relevant period.
  • The ‘relevant person’ (see EIM45090) in relation to the relevant step is the person to whom the relevant loan is made.
  • The relevant step gives rise to Part 7A income.