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HMRC internal manual

Restricted securities: calculation of charge: simple examples

(As always, the following are general examples, and the treatment in specific cases will be determined by the facts.)

The principles of the formula (see ERSM30400) can be illustrated with a simple example:

Example 1 - share price increases

1,000 restricted securities are given to John Coombs when their restricted market value is 75p per share.

If they were unrestricted their value would have been £1 per share.

The restriction lifts when unrestricted MV is £5.

The employee is charged by reference to £750 (75p per share) on acquisition, and at that time 25% of the share value has not be taxed.

Therefore on the lifting of the restriction there is a charge on

1,000 x £5 x 0.25 (or 25%) = £1,250.

The share are worth £5,000 and the employee has paid tax on £2,000 (£750 on acquisition and £1,250 on the lifting of the restriction). The other £3,000 in growth is treated as capital subject to CGT but not Income Tax.

Even if the share price goes down there is still, potentially, a charge under Chapter 2.

Example 2 - share price decreases

Sara Collings is given 1,000 restricted shares with an actual market value of 70p, and an unrestricted market value of £1.

The restriction is lifted at a time when the unrestricted market value has fallen to 60p.

Tax is paid on acquisition of the shares, based on the actual market value of 70p (70% of £1), so £700.

When the restriction lifts, the charge is on 30% of whatever the market value is at that time (whether it is higher or lower). In this case, the liability will be on 30% of 60p (18p), so £180.

Conceptually, it is useful to think of the employee as receiving a share in two instalments:

• firstly, in 70p worth of restricted share, which unfortunately declines to 42p (70% of 60p) and,
• secondly, in 30% of the share received at a later date (when the restriction is lifted), when it is worth 18p (30% of 60p).

So, if the shares were then sold for £600 (1,000 x60p) the employee would have a capital gains tax loss on disposal of £280, calculated by deducting from the sale price of £600 the ‘ cost ‘, being equal to the two charges to income tax of £700 + £180.