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HMRC internal manual

Employment Related Securities Manual

Employment-related securities and options: options used for avoidance

As from 2 December 2004 where

  • a securities option is acquired pursuant to a right or opportunity; and
  • that right or opportunity is made available under arrangements the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions; or
  • (if the acquisition is before 2 December 2004), something is done on or after that date as part of such arrangements;

then the securities option does not qualify for the exclusion from Chapters 2 - 4 in ITEPA03/S420 (5)(e) (by virtue of ITEPA03/S420 (8)) and so remains within the meaning of securities in ITEPA03/S420 (1).

If such an option is exercised, other securities of a different description are thereby acquired. So the option is, in these circumstances, a convertible security within the provisions of Chapter 3 (per ITEPA03/S436) - see ERSM40000. This means that it is subject to the anti-avoidance provisions within Chapter 3. Other Chapters, such as 2, 3A, 3B, 3C, 3D and 4, may also apply to create a liability to Income Tax or National Insurance Contributions.

Effect of using options for avoidance

Options remaining within the meaning of securities as a result of the application of the anti-avoidance provision in ITEPA03/S420(8) will, on acquisition as part of an avoidance scheme, be subject to the following special provisions:

ITEPA03/S431B A deemed election under ITEPA03/S431 to ignore the effect of any restriction on value. See ERSM30480.
ITEPA03/S437 (2)&(3) Disapplication of the normal convertible security provisions, so full market value is charged including the right to convert and assuming an immediate entitlement to convert. See ERSM40050.
ITEPA03/S446B The amount charged on acquisition is augmented by any previous depreciatory transactions. See ERSM50100.
ITEPA03/S446UA Any undervalue on acquisition, taking into account above adjustments, is to be immediately chargeable. See ERSM70200.

After acquisition, the detailed provisions of

  • Chapter 3 (convertible securities) - ERSM40000,
  • Chapter 3A (securities with artificially depressed value) - ERSM50000 
  • Chapter 3B (securities with artificially enhanced value) - ERSM60000,
  • Chapter 3D (disposals for more than market value) - ERSM80000, and
  • Chapter 4 (post-acquisition benefits) - ERSM90000 

continue to apply, so that any attempt to channel value to the employee after acquisition of the securities will be caught.

The anti-avoidance provisions listed above apply equally to all other forms of security within ITEPA03/S420.