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HMRC internal manual

Employment Related Securities Manual

Restricted Securities: Conditional shares acquired between 17 March 1998 and 15 April 2003: restricted shares subject to risk of forfeiture

Applying the normal rules for employment income, the entitlement to the forfeitable shares is earnings as the shares are money’s worth in the employee’s hands. There is a charge under ITEPA03/S62 (2)(b) when the shares are acquired, but no charge when the risk of forfeiture is lifted. There are two consequences to this.

  1. The employment income charge on acquisition must reflect the fact that the shares are subject to restrictions, and are therefore worth less than unrestricted shares.
  2. An employee who is taxed on the acquisition of forfeitable shares, but who subsequently forfeits the shares, does not get any relief for the income tax charged and so pays tax on something which he or she has had - but has not been able to keep.

For many years it was thought that the risk of forfeiture was not just another restriction but a feature which postponed the date on which the employee received money’s worth. We now know that is not right, and special legislation was enacted in 1998, in Section 140A to 140H ICTA 1988, which became Chapter 2 Part 7 ITEPA 2003, broadly to restore the position to that previously accepted, postponing the chargeable event for forfeitable shares until vesting. See ERSM30220+ for detailed guidance.