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HMRC internal manual

Employment Related Securities Manual

University Spin-outs

Restricted shares - opt out election

Some situations could arise where the deemed election would produce an unwanted result where the shares acquired have a value apart from the IP. New ITEPA03/S454(2) allows the employee and his employer to jointly agree to disapply the deeming provision referred to. The effect of this is that only the restricted value of the shares is taxable at acquisition (again excluding the value attributable to IP). Where the shares are forfeitable for up to 5 years there will be no charge up front. There will be a further Income Tax and NICs charge when the restrictions are lifted or the shares are sold.

Form of joint election by researcher and employer

An agreement under ITEPA03/S454(2) can only be made with the consent of both employee and employer because the agreement may affect the tax and NICs liabilities of both parties. The agreement must be made in a form approved by HM Revenue & Customs (HMRC) and must be made before, or within 14 days after, the acquisition of shares by the employee.

The employer will normally be the Research Institution unless the researcher is only employed by the spin-out company, when it will be the latter.

Once an agreement has been signed by both parties it is irrevocable. Each party should retain a copy and produce it to HMRC if requested.

Example 22

Ulysses is invited to join the same spin-out, Odyssey Ltd, as Homer (see ERSM100540) after 150 days, when funding has also been received and further research been done within the spin-out. The shares are restricted with a forfeiture condition if Ulysses leaves.


Ulysses will be aware that relief under Chapter 4A extends only to the value derived from the IP transfer agreement and has the choice to allow the deemed election to stand, and be chargeable on the unrestricted market value of the shares at acquisition, disregarding value attributable to the transferred IP but including any value attributable to the funding and further business development.

If Ulysses does this he will not be subject to any later charges to tax under Chapter 2. Alternatively Ulysses can opt out of the deemed election by making an agreement with his employer under ITEPA03/S454(2) so that he is only charged to tax on the restricted value of the shares at acquisition. If he does this, he will be charged to tax under Chapter 2 at a later date when the restrictions on the shares are lifted, or another chargeable event within ITEPA03/S427 occurs.