Restricted securities: exchanges of restricted securities on or after 17 July 2014
With effect from 17 July 2014, restricted securities may be exchanged for new restricted securities, for example on a takeover, without giving rise to an income tax charge under Chapter 2 of Part 7, as long as the transaction is within the terms of new ITEPA03/S430A.
Principles of the new rules
The intention of the provisions in ITEPA03/S430A is that, broadly, where restricted securities are exchanged for other restricted securities, then Chapter 2 will not give rise to a charge where additional value is not being received.
So, in a simple example, where:
- employees were awarded shares 2 years ago in their employer which were exempt from income tax because they were forfeitable for 4 years; and
- when the forfeiture restriction on their shares still has 2 years to run;
- on a takeover the employees exchange their shares for shares of equal value in the acquiring company, where the replacement shares are also forfeitable for 2 years;
there will be no Chapter 2 charge at the time of the exchange of the shares. Instead there will be a Chapter 2 charge on the full value of the new shares when the forfeiture restriction lifts.
While the concept outlined above is fairly straightforward, the provisions must deal with a wide variety of scenarios, including:
- restricted securities that are within the exemption of ITEPA03/S425 (ie forfeitable securities) being exchanged for restricted securities that do not qualify for the exemption because they are not within ITEPA03/S423(2) (ie other restricted securities);
- securities with more than one restriction being exchanged for other restricted securities after one of the restrictions has lifted;
- successive exchanges of restricted securities; and
- various combinations of the above.
As a result, the provisions required to achieve the intended outcome are somewhat lengthy and complex. The following guidance explains how the provisions work at ERSM30506 and ERSM30507. There are several examples at ERSM30508, which are intended to illustrate how the rules work.