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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Restricted securities: elections to exclude outstanding restrictions

Just as an employee and employer can jointly elect out of the deferral of a charge on acquisition of a forfeitable security, they can also elect to accelerate the taxation of any restricted share, including one where there is a forfeiture restriction.

An election may be either:

  • on acquisition (ITEPA03/S431 (1) or (2)), or
  • on the occasion of a chargeable event (ITEPA03/S430)

Conditions for election

The conditions for an election under ITEPA03/S430 or ITEPA03/S431 are the same as for an election under ITEPA03/S425 (3) (ERSM30370):

  • the election must be made by the employer and the employer jointly;
  • it must be made not more than 14 days from the date of the acquisition, or the chargeable event; and
  • it must be in a form approved by HMRC.

Election on acquisition - all restrictions ignored (ITEPA03 S431 (1))

On acquisition an election can be made to ignore all of the restrictions, to increase the amount charged to tax and NICs at that time and to remove any future Chapter 2 charge. This election modifies amounts charged under:

  • Money’s worth earnings - ITEPA03/S62
  • Conversion charge under Chapter 3 Part 7 (convertible securities)
  • Operating Chapter 3C (securities obtained for less than market value)
  • Determining employment income under Chapter 5 Part 7 (securities options)
  • Determining employment income under Chapter 2 Part 7A (employment income provided through third parties)
  • Disapplies ITEPA03/S425 to ITEPA03/S430 inclusive.

So, in the example involving two restrictions at ERSM30430 an election might be made on acquisition to ignore all the restrictions and pay the tax on the initial unrestricted market value of £100.

Election on acquisition - some restrictions ignored (ITEPA03 S431 (2))

Where there is more than one restriction an election can be made to ignore one or more restrictions, but leaving one or more restrictions to be taken into account in charging the acquisition. This could be used where one restriction is expected to be lifted but another, such as pre-emption rights in a family company, will remain on the security indefinitely. This election also disapplies ITEPA03/S425 to ITEPA03/S430 with regard to the specified restriction only.

Election on subsequent chargeable event (ITEPA03 S430)

Again, in the example involving two restrictions at ERSM30430 the employee might continue to defer the charge on acquisition (because of the risk of forfeiture) but might elect to pay the full tax at the three year point, as if all restrictions were lifted at that stage. If such an election were made, the charge would be on £200 at year 3 and there would be no charge at year 5.

Form of election

Examples of election forms can be found by clicking on the links below:

Form for joint S430 election by employer and single employee (Word 26KB)
Form for joint S430 election by employer and many employees (Word 35KB)
Form for joint S431 election by employer and single employee (Word 26KB)
Form for joint S431 election by employer and many employees (Word 36KB)

Certain deemed elections

Elections under ITEPA03 S431 (1) are deemed to occur in certain circumstances:

  • Shares acquired under tax-advantaged schemes - see ERSM30470
  • Securities acquired as part of avoidance scheme - see ERSM30480

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Elections from 6 April 2015

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. However, elections under ITEPA03/Ss425(3), 430 and 431 may not be made unless at the time of the chargeable event (in the case of section 430) or the acquisition (in the case of sections 425(3) and 431), the earnings from the employment are general earnings to which any of the charging provisions of Chapters 4 and 5 of Part 2 applies.