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HMRC internal manual

Employment Related Securities Manual

Securities acquired for less than market value: what is taxed?

By virtue of ITEPA03/S446Q(1) the Chapter applies if

  • nothing is paid to acquire the securities at or before the time of acquisition: or
  • the payment made at or before the time of acquisition is less than their market value (see ERSM70050).

Any obligation to pay more later on is ignored.

In practice there are four main kinds of transaction covered:

Partly paid shares. A partly paid share is a share which is issued for an amount which is less than its full paid up amount. The fully paid up value of a share cannot be below its par value. For example, a £1 share may be issued partly paid at 10p. The company can then ask the shareholder to pay up the 90p difference between the subscription price and the par value of £1. There is said to be a 90p call attached to each share. The reference to “market value” of an employment-related security for Chapter 3C is to what the market value would be if the security were fully paid-up. The employee on acquisition of a partly paid share, if he or she pays nothing for the share, receives money’s worth of, in this example, only 10p with the 90p left outstanding to be paid if and when the company calls for it.

Purchase price left outstanding. All or part of an agreed purchase price payable by the employee may be left outstanding as a loan from the vendor.

Securities acquired under options. Up to 5 April 2015, only options to acquire securities that are granted to employees who are UK-resident at the date of grant are taxed under Chapter 5 of Part 7. Therefore, until 5 April 2015, Chapter 3C charges securities acquired under options granted in respect of UK duties to an employee who was not UK-resident at the time the option was granted. (See ERSM70400 et seq.)

Loan made to trustees who hold the shares as settled property on behalf of the employee.

Options acquired by employees not UK-resident (up to 5 April 2015)

Until 5 April 2015, where an employee who is not resident in the UK is granted an option there may be a charge on grant of the options in addition to a Chapter 3C charge on exercise, because there is no equivalent exemption to that at ITEPA03/S475 in Chapter 5. The charge is under ordinary money’s worth principles on the value of the option - see ERSM20500.

From 6 April 2015, with the removal of the residence exclusion at ITEPA03/S474 (see ERSM20300), Chapter 5 will apply to all employment-related securities options, regardless of residence status at the time of the grant of the option, so that Chapter 3C no longer has particular significance in relation to options and residence.