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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Employment-related securities and options: replacement and exchanges of securities and securities options

Replacement or additional securities

Where a person holds employment-related securities and acquires additional or replacement securities by virtue of being entitled to those original securities, the additional or replacement securities are also “employment-related”. The acquisition of the replacement or additional securities is to be regarded as pursuant to the same right or opportunity as the original securities (see ITEPA03/S421D (2)).

Where the original securities are not employment-related the additional or replacement securities may still be employment-related securities (for example where they are acquired from the employing company under a rights or bonus issue) by virtue of ITEPA03/S421B.

Exchanges of restricted or convertible securities

There is no rollover relief for convertible securities. So liability can potentially arise on disposal of the original shares. Before 17 July 2014 there was likewise no rollover relief for restricted securities. See ERSM30500 for exchanges of restricted securities before 17 July 2014 and ERSM30505 for exchanges of restricted securities from 17 July 2014.

Acquisition of new securities

Where additional or replacement securities are acquired there is a potential charge if they are acquired for less than their market value - see ITEPA03/S446Q in Chapter 3C. However, in most reorganisations of share capital or in a take-over what has been given up matches in value what has been acquired.

Subsection (3) of ITEPA03/S421D provides that where the market value of the original securities is reduced by reason of the issue of replacement securities or the additional securities, the amount of that reduction is to be treated for the purposes of Chapters 2 and 3 as consideration or additional consideration given for the acquisition of the replacement securities or the additional securities.

Up to and including 16 July 2014 we accept for the purposes of Chapter 3C that such a reduction in value of the original securities (to nil if they are completely given up in exchange) may be regarded as a “payment” given for the new securities in the deductible amounts in subsection (3)(a) of ITEPA03/S446T in computing the amount of the notional loan. After 16 July 2014, the treatment of a reduction in value of the original securities as a payment for the purposes of Chapter 3C in specifically included in subsection (3) of ITEPA03/S421D - see also ERSM70110.

In practice, problems are unlikely to arise where employees hold quoted shares. Where the shares are unquoted, an examination of the circumstances should quickly determine whether value has been transferred from one group of shareholders to the employees.

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Example 1: full relief

If there is a single class of shares and a one-for-one bonus issue each share will halve in value. So, if the share price were originally £1, each share will now be worth 50p. The employee will have received an additional share worth 50p from which is deducted the 50p fall in value of the original share (£1 down to 50p), leaving a gain of nil.

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Example 2: partial relief

If, say, the employees have A shares, whereas everyone else has ordinary shares, and there is a bonus issue just to the A shareholders, then value will have been transferred from the ordinary shareholders to the employees and a charge to tax may arise.

For example, say there are 900 ordinary shares each worth a £1 and 100 A-ordinary shares each also worth a £1 and held by employees. If there is a one-for-one bonus issue to A-ordinary shareholders, then although the total worth of the company remains at £1,000, the A-ordinary shares are now worth 91p each, so the 200 A-ordinary shares now held by employees are worth £182. The employees will be chargeable on the value of shares acquired (£91) less the reduction in value of the original shares (£9), giving an amount chargeable of £82, under Chapter 1 Part 3 or Chapter 3C Part 7.

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Replacement options

Where the employment-related securities option is a new option and is the whole or part of the consideration for the assignment or release of another employment-related securities option (the old option), references to the acquisition are to the acquisition of the old option (see ITEPA03/S483).

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Exchanges of options

See ERSM110800 for the rollover provisions concerning options.