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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Restricted Securities: Shares acquired before 16 April 2003

These rules continue to apply to restricted shares acquired before 16 April 2003 but, as from 6 April 2003, they were re-written and are now set out in Chapter 4 of ITEPA in ITEPA03/S449, ITEPA03/S450, ITEPA03/S451 and ITEPA03/S452 (as originally enacted).

In 1988 a distinction was drawn between a risk of forfeiture and other restrictions.

Shares with a risk of forfeiture were not regarded as acquired until the risk of forfeiture was lifted and no charge therefore arose on acquisition of these shares.

For other shares subject to a restriction, the charge on acquisition was based on the restricted value of the share.

The following examples are necessarily general - how the law applies in actual cases will depend on the specific facts of each.

Example 1 (employee not resident & ordinarily resident - non-Case I employee)

Martin New is given shares with an unrestricted value of £1,000, which, because they cannot be sold for three years, only have an actual market value of £850. The employee is taxed on the market value of £850.

Employees who were not within Case I of Schedule E did not have any further liability to tax.

An employee who is both resident and ordinarily resident (Case I of Schedule E) faces a possible further charge under FA88/S78. Under section 78 there is a charge to tax on the increase in the market value of the shares that arose from the lifting of the restriction.

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Example 2 (employee resident & ordinarily resident - Case I employee)

Susan Fletcher is given shares with an unrestricted value of £1,000, which, because they cannot be sold for three years, only have an actual market value of £850. The employee is taxed at acquisition on the market value of £850. If the employee is then told, shortly after the acquisition that the restriction on sale is lifted the shares will increase in value from £850 to £1000. This increase of £150 will be charged under section 78.

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Expiry of time-related restrictions

The charge under Section 78, which became ITEPA03/S451 (1) as originally enacted, was based on the increase in the value of the shares, when comparing the market value immediately before the lifting of the restriction with the market value immediately after. So it did not address properly time-related restrictions, which wasted away over time so that their value immediately before lifting was the same as that immediately afterwards, giving a charge of nil.