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HMRC internal manual

Employment Related Securities Manual

Restricted securities: securities acquired on or after 16 April 2003: introduction

Schedule 22 Finance Act 2003 introduced a new set of rules for taxing restricted shares and securities. The rules cover all restrictions, including the risk of forfeiture.

For Chapter 2 to apply the securities (or interest in the securities) must be restricted at the time they are acquired. If an employee acquires unrestricted shares and restrictions are later placed on the shares then Chapter 2 will not apply.

The reason for this is that the employee will have paid the full market value for the unrestricted shares (or been taxed on that value). If the value is then later reduced by the imposition of restrictions this is a capital gains matter and no income tax relief is given for the reduction in value. There is therefore no reason to impose a charge to income tax if there is a later increase in value should the restriction be removed.

The new rules involve:

  • Defining what is a restricted security.
  • Relief from initial charge where the securities are potentially forfeitable within 5 years.
  • Chargeable events on the lifting or varying of restrictions and on disposal of securities.
  • Computation of gains based on formula.
  • Various exemptions.

Initial charge on acquisition of restricted securities

Where they are not exempt, (see ERSM30370), if restricted securities are acquired for less than their actual market value, taking account of the restrictions, an initial money’s worth charge arises under ITEPA03/S62 on the actual market value less any consideration paid (see ERSM20500 for further guidance on the moneys worth charge).

There are special rules relating to the acquisition of forfeitable securities, see ERSM30320 and ERSM30370.

Employees, not resident or not ordinarily resident in UK, up to 5 April 2015

For securities acquired up to 5 April 2008 Chapter 2 Part 7 ITEPA does not apply unless the securities are acquired at a time when the employee is both resident and ordinarily resident in the UK. For securities acquired after that time, the Chapter does not apply unless the securities are acquired at a time when the employee is resident in the UK. Where Chapter 2 does not apply for this reason, the money’s worth charge on acquisition under section 62, based on the restricted market value, will apply where the residence rules for general earnings allow. (See the Residence, Domicile and Remittance Basis Manual at RDRM10425). When the restriction is lifted a charge on the increase in value will only arise where the increase in value does not arise from a genuine commercial purpose.

If the lifting of the restriction is part of a tax avoidance scheme to exploit the fact that the rules in Chapter 2 Part 7 ITEPA only apply to UK-resident employees, then a charge may arise under Chapter 3B.

For the application of the employment-related securities rules to internationally-mobile employees in general, see ERSM160000.

From 6 April 2015, with the removal of the residence exclusion at ITEPA03/S421E (see ERSM20300), Chapter 2 can apply to restricted securities acquired whilst the employee is not resident in the UK and not carrying out duties in relation to a UK employment.