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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Securities with Artificially Depressed Value

Charge on acquisition

ITEPA03/S446B imposes the following conditions before there can be an acquisition charge under Chapter 3A:

  • The market value of employment-related securities at the time of the acquisition must have been reduced by at least 10% as a result of things done otherwise than for genuine commercial purposes (see ERSM50020) within the period of 7 years ending with the acquisition.
  • ITEPA03/S425 (2) (no charge on acquisition of certain restricted securities or restricted interests in securities) (ERSM30320) must not apply in relation to the employment-related securities. As from 2 December 2004 ITEPA03/S431B ensures that there is a deemed election under ITEPA03/S431 to remove the deferral of charge provided by ITEPA03/S425 (2).

The charge is in addition to those arising in respect of the acquisition of the employment-related securities under—

  1. Chapter 1 of Part 3 (earnings),
  2. Chapter 10 of Part 3 (taxable benefits: residual liability to charge),
  3. Chapter 3 of this Part (acquisition by conversion),
  4. Chapter 3C of this Part (acquisition for less than market value), and
  5. Chapter 5 of this Part (acquisition pursuant to securities option).

Amount of charge

The taxable amount is determined under ITEPA03/S446C and counts as employment income of the employee for the tax year in which the acquisition occurs. It is:



FMV (full market value) is what would be the market value of the employment-related securities at the time of the acquisition if the depreciatory transactions had not been done, and

MV (market value) is the actual market value of the employment-related securities at the time of the acquisition.

These values are modified in certain circumstances:

  • Where what would be MV is less than any consideration given for the acquisition of the securities, MV is the amount of that consideration – ITEPA03/S446C (4).
  • Where the securities are restricted securities, FMV (but not MV) is determined as if they were not restricted securities; and ITEPA03/S426 to ITEPA03/S431 (post-acquisition charges on restricted securities) do not apply.
  • Where the securities are convertible securities, FMV and MV are determined as if they were not, i.e. the right to convert is ignore in the valuation.

Example 1: depreciatory transaction before acquisition

An uncommercial option over the majority of unissued shares in the company is granted to a family trust, so that when a few shares are issued to the employee, the market value of those shares when the employee acquires them is much lower than it would otherwise have been. The option grant is a thing done to depreciate the value of the employee’s shares.The employee’s shares are worth £2,000 (which has not been paid) but without the option, they would have been worth £1,000,000.

The charge under ITEPA03/S446B & C is:

FMV – MV = £1,000,000 - £2,000 = £998,000

in addition to which there is an ITEPA03/S62 money’s worth charge on £2,000.

There may also be a charge under ITEPA03/S222 where PAYE has not been paid over within 90 days (see EIM11951).

Example 2: shares acquired by another person as part of avoidance scheme

Where there is a conditional share scheme involving forfeitable shares the value of which has been paid out as a dividend – it is the dividend that is a non-commercial (depreciatory) transaction. Such a scheme may involve a subsequent forfeiture of the depreciated shares to an EBT or the employer.

ITEPA03/S421B (1) defines any security acquired where the right or opportunity to acquire is available by reason of the employee’s employment as an employment-related security and therefore potentially within Chapter 3A.

In such situations the EBT or employer will have acquired depreciated securities and the taxable amount will count as employment income of the employee under ITEPA03/S446B.