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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Employment-related securities and options: exclusions: former and prospective employments (up to 5 April 2015)

From 6 April 2015 the residence exclusions in Part 7 of ITEPA03 and their application to former and prospective employments have been removed. (See ERSM160000 and in particular ERSM162000.)

Therefore the rest of this page relates to the period up to 5 April 2015.

Former employments

Acquisitions of securities or options after the employment has ceased are only excluded from the rules of Chapters 2 to 4 and Chapter 5 if they would also have been excluded if the acquisition had occurred in the last year of that employment.

The legislation is at ITEPA03/S421E (3) for securities and ITEPA03/S474 (2) for options.

Prospective employments

Similarly, acquisitions of securities or options before the employment has started are only excluded from the rules of Chapters 2 to 4 and Chapter 5 if they would also have been excluded if the acquisition had occurred in the first year of that employment.

The legislation is at ITEPA03/S421E (4) for securities and ITEPA03/S474 (3) for options.

Former and prospective employments and split-year treatment

ITEPA03/S421E and ITEPA03/S474 need to be read as a whole in order to determine how the rules on split year treatment and former and prospective employments work together.

Where the employment is held at the time that the securities or options are acquired then the rules in subsections (1), (1A), (1B), (2) and (2A) of ITEPA03/S421E and (1) and (1A) of ITEPA03/S474 are applied. Where the employment is not held at that time, then subsections (3) or (4) (as appropriate) of ITEPA03/S421E (or subsections (2) or (3) of ITEPA03/S474) apply to treat the acquisition as occurring in the last or first year of employment and the tests in (1) to (2A) of ITEPA03/S421E and (1) and (1A) of ITEPA03/S474 are applied accordingly.

Employment ceasing or commencing in a split year

If the last year of employment is itself a split year, then the words of subsections (3) and (4) of ITEPA03/S421E (and of subsections (2) and (3) of ITEPA03/S474) appear to create a difficulty as those subsections do not mention split years. On a strict reading of the legislation, cessation of employment in a split year would mean that the split year treatment had no effect. However, it was not the intention of the legislative change that this should be the outcome.

ESC A11 is applied in respect of Part 7 to treat the split parts of years as separate tax years, so that ITEPA03/S421E (and ITEPA03/S474) could apply to them without any difficulty. If employment ceased in the UK part of the split year, then Chapters 2 to 4 (and Chapter 5) applied. If it ceased in the overseas part of the split year, then Chapters 2 to 4 (and Chapter 5) did not apply.

HMRC will treat the references to “tax year” in subsections (3) and (4) of ITEPA03/S421E (and in subsections (2) and (3) of ITEPA03/S474) as including, where appropriate, parts of split years, so if the last year in which the employment was held was a split year, and the employment ceases in the UK part of the split year, then it is not the case that Chapters 2 to 4 (and Chapter 5) would not have applied. So Chapters 2, 3 and 4 (and Chapter 5) will apply where the employment ceases in the UK part of a split year.

And if the employment ceases in the overseas part of the split year, then it is the case that Chapters 2 to 4 (and Chapter 5) would not have applied if the acquisition had taken place in the overseas part of the split year, so Chapters 2 to 4 (and Chapter 5) do not apply where the employment ceases in the overseas part of the split year.