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HMRC internal manual

Employment Related Securities Manual

From
HM Revenue & Customs
Updated
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Restricted Securities: Shares acquired before 16 April 2003: general meaning of chargeable event

The change may be in respect of the class in which the employee holds shares or in respect of a completely different class of shares. This is because the shares held by the employee will increase in value if the rights relating to shares of a different class are diminished. The effect is the same as if the rights relating to the class of shares in which the employee has a holding were improved.

The rights or restrictions referred to may be contained in the Articles of Association of the company, or may be imposed by any contract or arrangement, or in any other way. They might for instance be found in:

  • the employee’s contract of employment
  • a shareholders’ agreement
  • a separate agreement entered into by employer and employee, or by the employee and the company issuing the shares, or even
  • be imposed by a verbal agreement.

Providing that there is an increase in the value of the shares as a result, the following are chargeable events:

  • The removal or variation of a restriction to which the employees’ shares are subject. For example, the employee may acquire shares subject to the restriction that they may not be disposed of for five years. This restriction will depress the market value of the shares compared to the market value of otherwise identical shares which can be freely sold. If, before the expiry of the five-year period, the restriction is lifted or reduced to a smaller number of years, the value of the shares will increase (FA88/S78 (2)(a), which became ITEPA03/S450 (3)(a) as originally enacted).
  • The creation or variation of a right relating to the employees’ shares. For example, if an employee acquires shares which have no voting rights, or only limited voting rights, and the shares are later awarded full voting rights, the value of the shares will increase because they have new or enhanced rights (FA88/S78 (2)(b), which became ITEPA03/S450 (3)(b) as originally enacted).
  • The imposition of a restriction on other shares in the company or the variation of a restriction to which such other shares are subject. For example, suppose that a company has two classes of shares. The employees acquire shares in class ‘A’. Later shares in class ‘B’ are made subject to the restriction (which does not apply to the ‘A’ shares) that their voting rights may not be exercised for a period of five years, or an existing restriction on the exercise of voting rights is made more onerous. Because of this the degree of control that the ‘A’ shareholders can exercise over the company’s affairs will be enhanced and the ‘A’ shares will increase in value as a result (FA88/S78 (2)(c),which became ITEPA03/S450 (3)(c) & (d) as originally enacted).
  • The removal or variation of a right relating to other shares in the company. For example, suppose that a company has two classes of shares, both of which have identical dividend rights. The employees acquire shares in class ‘A’. Subsequently the rights of the class ‘B’ shares are changed, either removing their dividend rights completely or making them subservient to the dividend rights of the class ‘A’ shares. As a result the class ‘A’ shares held by the employees will increase in value (FA88/S78 (2)(d), which became ITEPA03/S450 (3)(e) as originally enacted).