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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Securities acquired for less than market value: cases outside chapter 3C

There are many circumstances where, even if securities have been acquired for less than their market value, no charge will arise under Chapter 3C, because Chapter 3C is a sweeping up provision over which other provisions take priority.

Priority for other charging provisions

The application of ITEPA03/S446T and ITEPA03/S446V means that the following provisions take priority of charge:

  • Chapter 1 of Part 3 (earnings),
  • Chapter 10 of Part 3 (taxable benefits: residual liability to charge),
  • From 1 September 2013, section 226A (an amount treated as earnings in respect of employee shareholder shares)
  • Chapter 3 of Part 7 (acquisition by conversion),
  • Chapter 3A of Part 7 (securities with artificially depressed market value), or
  • Chapter 5 of Part 7 (acquisition of securities pursuant to securities option)
  • From 6 April 2011, Chapter 2 of Part 7A (employment income provided through third parties).

However, if the amount charged under Chapter 3C would be greater than that charged under any of those provisions, the excess is chargeable under Chapter 3C.

Specific exclusions from Chapter 3C charge

Chapter 3C is specifically disapplied in certain circumstances:

* Death ERSM20270
   
* 7 years after leaving employment ERSM20280
* Certain control situations (company employee controlled, or where majority of shares are not employment-related securities) ERSM20290 - see example below
* Up to 5 April 2015, if residence of employee takes general earnings outside UK tax ERSM20300, but see also ERSM70400.
* Public offers ERSM20370

Example: employee control

YL Ltd has 100 ordinary shares held by two founder-directors, Yeoh and Lig. Yeoh and Lig decide to retire and sell their shares to two managers, Webster and Rafferty. As the company is very profitable it would be too expensive for Webster and Rafferty to buy the shares outright even though all parties agree full market value will be payable. So 50% of the amount due is left on account to be paid in instalments over the following 5 years.

Webster and Rafferty have acquired shares for less than their market value but under ITEPA03/S446R:

  • the employment-related securities are shares (subsection (1)(a) test)
  • all the shares are acquired for less than market value (subsection (1)(b) test)
  • no avoidance is involved (subsection (1A) test)
  • company is employee-controlled (subsection (3) test)

All tests are satisfied, so there is no charge under Chapter 3C.

See also ERSM70040 on relief from Chapter 3C where there is a debt created to buy shares in a close company.