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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Securities with Artificially Depressed Value


Chapter 3A in Part 7 of ITEPA is designed to counter avoidance by artificial reductions (things done other than for genuine commercial purposes, see ERSM50020) to the value of securities. It addresses value manipulation by depreciatory transactions.

How this chapter works

Chapter 3A treats the artificial reductions as employment income and generally works by replacing the reduced market value in the calculation for each chargeable event with a figure of market value ignoring the artificial reduction.

Chargeable events affected

The charge applies where the market value of a security has been reduced by more than10% in a relevant period in connection with:

* The acquisition of securities ERSM20500
* Restricted securities – chargeable events ERSM30390
* Conditional interests (forfeitable shares) acquired before 16 April 2003 – chargeable events ERSM30230
* Convertible securities – chargeable events ERSM40060
* Disposal of securities for more than market value ERSM80010
* Securities benefits not otherwise subject to tax ERSM90020

How artificial reductions affect tax charges

Broadly, there are four areas where a reduction in the value of securities might reduce the liability to tax if unchallenged:-

  • reducing the value before securities are acquired by employee;
  • reducing the value after acquisition of the securities but before there is a charge to tax;
  • reducing consideration received on a disposal of securities; and
  • reducing a benefit received in connection with securities.

See examples at ERSM50030.

What to do if there is potential Chapter 3A liability

You must seek advice from the Employee Shares and Securities Unit (ESSU) – see ERSM10040.

Multiple charges

If unusual structures or transactions which have their own tax consequences are used in an attempt to avoid tax it is highly likely that multiple charges to Income Tax and NICs will arise under Chapter 3A and elsewhere. Where multiple charges arise in an avoidance case, advice on how to pursue these should be obtained from ESSU – see ERSM10040.