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HMRC internal manual

Employment Related Securities Manual

International from 6 April 2015: just and reasonable override - from 6 April 2015: example 3 - taxpayer-favour adjustment in respect of leaving employment during the relevant period

Nina is awarded a nil cost securities option on 1 September 2010 which is contingent upon continued employment until it vests (see ERSM162565 on the meaning of ‘vests’) on 31 August 2015. She is R/NOR in 2010/11, 2011/12 and 2012/13. (See EIM42810 and ERSM162625 regarding residence before 6 April 2013.)

Nina works wholly in the UK in the period from 1 September to 5 April 2011 and then spends half of her workdays in 2011/12 in the UK and half overseas. From 6 April 2012 to 31 August 2012, Nina again works half in the UK and half overseas. On 31 August 2012, Nina leaves her employment and returns home to India. She does not lose her entitlement to exercise her securities option, but the earliest time at which she may do this remains 31 August 2015.

On 1 September 2015, Nina exercises her option and acquires her shares. The gain is £182,600.

Nina claims the remittance basis for her years of UK residence, 2010/11, 2011/12 and 2012/13.

The relevant period in accordance with ITEPA03/S41G(8) runs from 1 September 2010 to 31 August 2015. For part of that period, ITA07/S809B applies to Nina and for the remainder of the period she is not UK resident.

ITEPA03/S41H(7) applies to her for 2010/11, 2011/12 and 2012/13. Also, within the relevant period, Nina is not resident in the UK from 6 April 2013 to the end of the relevant period on 31 August 2015, so that ITEPA03/S41H(8) applies.

In accordance with ITEPA03/S41H(2), the securities income is treated as accruing evenly over the relevant period: that is £100 per calendar day (five years including one leap year).

In the part of the relevant period that runs from 1 September 2010 to 5 April 2011, all of Nina’s duties are performed in the UK, so, of the securities income treated as accruing over that period (217 x £100 = £21,700), none is foreign.

In 2011/12 half of Nina’s duties have been performed in the UK, so of the securities income treated as accruing over that period (365 x £100 = £36,500) half (£18,250) is chargeable foreign securities income.

In 2012/13, half of Nina’s duties have been performed outside the UK, so the statute at ITEPA03/S41H(6) would treat half of the securities income accruing over the year (365 x £100 = £36,500 x ½ = 18,250) as chargeable foreign securities income.

ESC A11 (ERSM20310 and ERSM70460) would treat the part of 2012/13 following Nina’s return to India as a period of non-residence, but, as there are no duties in that part of the year, this would not have the effect of reducing Nina’s UK tax liability, since, by virtue of ITEPA03/S41H(8), none of the securities income treated as accruing over that period would be unchargeable foreign securities income.

From 6 April 2013 until the end of the relevant period, Nina performs no duties of the employment, so, again, the effect of ITEPA03/S41H(8) is that, of the securities income treated as accruing over the remainder of the relevant period (879 x £100 = £87,900), none is foreign.

So, of the total securities income of £182,600, £36,500 is chargeable foreign securities income and £146,100 is charged as taxable specific income in the UK in 2015/16.

This does not appear to be a fair result. Of the time from the start of the relevant period up to the cessation of Nina’s employment, her duties were split between UK and foreign duties at around 64.8% to 35.2%. The just and reasonable override would give effect to this and treat £64,275 as foreign.