HMRC internal manual

Employment Related Securities Manual

Employment-related securities and options: money’s worth charge

You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.

Acquisitions of options - money’s worth

See ERSM110500 for the taxation consequences and ERSM110060 for the exemptions where securities options are granted to employees.

Acquisition of securities - money’s worth

Whenever an asset in the form of a security is acquired by an employee from his or her employment free or for less than its market value there will be a charge, because the employee who receives securities at less than their market value receives money’s worth. (See EIM00530.) This is subject to exemption or modification by specific provisions of Part 7 ITEPA. (See below.)

The securities can be sold for their full value and the difference between what can be got for them and what was paid for them is the measure of the perquisite or emolument, now included within the term “earnings” - see Weight v Salmon (ERSM20510). It does not matter that the employee does not actually sell them. Even if the securities are received on the condition that they cannot be sold for a period of years, or without special permission, the employee still receives money’s worth as there are other means than a sale of turning securities to pecuniary account - see Ede v Wilson (ERSM20520).

Legislation on money’s worth

Most of the legislation specifically related to employment related securities is in Part 7 ITEPA 2003. Income falling within Part 7 is treated as “specific employment income” (see ERSM20100), whilst other remuneration falls to be classified as “general earnings”.

Earnings are defined in ITEPA03/S62 (2)(b) as “any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth”. Subsection (3) goes on to define money’s worth as:

For the purposes of subsection (2) “money’s worth” means something that is-

1. of direct monetary value to the employee, or
2. capable of being converted into money or something of direct monetary value to the employee.

The old legislation under ICTA88/S19 made the same distinctions, but earnings were “emoluments”, which were defined at ICTA88/S131 as including “all salaries, fees, wages, perquisites and profits whatsoever.” Acquisition of shares was normally described as a perquisite of the employment.

See following pages for:

  • Ways of getting shares and types of share scheme - ERSM20530
  • When shares are received - ERSM20540
  • Case law on money’s worth -ERSM220030

Example: shares acquired by employee

Cheryl Hastings is the managing director of Zorn Ltd. She is persuaded to join a rival company, Chester Ltd, by their offer to allow her to subscribe for 5,000 Chester Ltd ordinary 25p shares at par.

The shares were issued to Cheryl on the day she started work for Chester Ltd. The market value of the each share was then £1.87.

What amount, if any, is chargeable on Cheryl as employment income?

Cheryl receives shares from her employment. The market value on the date of issue is

£1.87 x £5,000 = £9,350,

but Cheryl pays only £1,250 - the par (face value) of 25p. The difference of £8,100 is charged under ITEPA03/S62, as it is a payment which is capable of being converted into cash (money’s worth).

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Interaction with Chapter 3C (securities acquired for less than market value)

In certain circumstances the acquisition of securities for less than their market value may not be caught, or fully caught, by the money’s worth charge.

  • The acquisition of securities may not be chargeable as “earnings”- the charge as earnings is on earnings from the employment. (See EIM00600). The test for the application of Part 7 is that securities are acquired “by reason of employment”. There is a useful discussion of the difference at EIM20503 in the context of the benefits code, but it is also relevant to the application of Part 7. In the unusual circumstances where securities do not constitue earnings from the employment but are acquired by reason of employment the charge will be under Chapter 3C. See ERSM70000 et seq.
  • Normally the money’s worth and the market value per TCGA92/S272 are the same, but where they differ any additional value over and above the money’s worth value is chargeable under Chapter 3C.

However a money’s worth charge takes priority over one under Chapter 3C, per ITEPA03/S446V - see ERSM70000 for further details.

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Modifications to money’s worth charge

Various provisions in Part 7 modify the money’s worth charge on acquisition of securities. They are:

  • ITEPA03/S425 acquisition of forfeitable securities - see ERSM30370
  • ITEPA03/S431 elections for restricted securities - see ERSM30450
  • ITEPA03/S437 acquisition of convertible securities - see ERSM40050
  • ITEPA03/S452 acquisition of shares in research institution spin-out companies - see ERSM100100
  • Other charges may arise on the acquisition of securities under:
  • ITEPA03/S446B charge where acquired at artificially depressed value - see ERSM50100
  • ITEPA03/S476 acquisition pursuant to an option - see ERSM110500