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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Employment-related securities and options: ‘by reason of employment’

Prior to Finance Act 2003, the test as to whether the legislation could charge gains to Income Tax, as opposed to CGT, was usually whether the shares or other securities were acquired ‘by reason of employment’. This factual test made it very easy for directors to claim that their shares were ‘founders’ shares’ and not acquired by reason of their employment and in that way to take employment reward associated with those shares out of the charge to Income Tax and NICs. To prevent this, Finance Act 2003 introduced a deeming provision based on the one that existed for the notional loans and stop-loss legislation in the old ICTA88/S162 (Chapters 8 and Part 3 ITEPA 2003).

What the rules apply to

ITEPA03/S421B sets out the rules for applying the legislation to securities and ITEPA03/S471 does the same for securities options.

The basic rule applies the legislation to securities, or an interest in securities, or an option acquired by a person where the right or opportunity to acquire the securities, interest or option is available by reason of an employment of that person or any other person. This is a factual test and is set out in subsection (1) of ITEPA03/S421B and subsection (1) of ITEPA03/S471.

Note that anyone can acquire the securities under a right or an opportunity (a wider term) referable to someone’s employment. It is the employee who is then subject to taxation.


Mr A is employed by B Ltd. B Ltd intends to issue 100 shares to Mr A to reward him for his hard work during the year. Mr A asks the company to give the shares to Ms C rather than to him. Ms C has acquired securities from an opportunity made available by reason of Mr A’s employment. Her securities are therefore employment-related securities and Part 7 ITEPA03 will be relevant. Any charges which fall due will be chargeable on Mr A, because the opportunity was made available by reason of his employment.

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The deeming provision

The deeming provisions set out in subsection (3) of ITEPA03/S421B and subsection (3) of ITEPA03/S471 state that if it is the employer or someone connected with the employer who makes available the right or opportunity, then the employee is deemed to have acquired the securities or interest or option by reason of his/her employment (see ERSM20220).

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Definition of “employment”

“The employment”, in relation to employment-related securities or employment-related securities options, means the employment by reason of which the right or opportunity to acquire the employment-related securities or options is available (“the employee” and “the employer” being construed accordingly unless otherwise indicated) See also ERSM20240.