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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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University Spin-outs

Restricted shares - general

Some spin-out companies may issue restricted shares. These are shares, the market value of which is less than it would otherwise be because they carry restricted rights or a disadvantage would arise from exercising rights attached to them. Whilst there may be an Income Tax charge under Chapter 2 of Part 7 ITEPA 2003 when these shares are acquired, there may also be a charge when the restrictions on the shares are lifted or the shares are disposed of.

In order that researchers can get the full benefit of the proposed measure when restricted shares are acquired, ITEPA03/S454(1) deems an election under ITEPA03/S431(1) to have been made at the time the shares are acquired. This means that the restrictions on the shares will be ignored for tax purposes and the shares’ unrestricted market value at acquisition (that is, ignoring the value attributable to IP and the effect of the restrictions) will be taxed. There will be no further Income Tax or NICs when the restrictions are lifted or the shares are sold.

Example 21

Homer is invited to join a spin-out, Odyssey Ltd, at set-up and satisfies the conditions for relief. He is offered 100 shares for £1 par value, which are forfeitable under certain circumstances for a period of 3 years. The value taking into account the IP transfer agreement is £10 per share, the additional value of £9 being put into Odyssey through the IP.


Under Chapter 2 there would be no charge on Homer at acquisition but after 3 years when the risk of forfeiture lifts this would be treated as a chargeable event. The market value of each share at that date is £30, but by then the original IP transferred under the agreement will only be one element contributing to this. Other factors might be money from external funding or the value of further developments to the IP by the spin-out itself.

The deemed ITEPA03/S431(1) election means that the full market value of £1,000 is chargeable to tax at the date of acquisition. Full effect of Chapter 4A can be given to disregard the effect of the element relating to the IP transfer agreement and no tax will be due. There will be no further chargeable event when the forfeiture condition lifts. Homer’s position may be summarised as:

  Market value of shares on acquisition, deemed to be unrestricted by S431 election £1,000  
  Relief under ITEPA03/S452 – IP ignored (£900)  
  Amount subscribed for shares (£100)  
  Acquisition charge nil