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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Securities acquired for less than market value: annual charge

Notional loan

Where securities have been acquired for less than their market value then an interest-free loan is treated as having been made to the employee by the employer at the time of acquisition.

All of the following notional loan provisions apply as if the notional loan were an employment-related loan as defined in ITEPA03/S175 if, and for as long as, the employment has not terminated:

ITEPA03/S175 (benefit of taxable cheap loan treated as earnings)

ITEPA03/S178 (exception for loans where interest qualifies for tax relief)

ITEPA03/S180 (threshold for benefit of loan to be treated as earnings)

ITEPA03/S182 (normal method of calculation: averaging)

ITEPA03/S183 (alternative method of calculation)

ITEPA03/S184 (interest treated as paid)

ITEPA03/S185 (apportionment of cash equivalent in case of joint loan, etc.)

ITEPA03/S187 (aggregation of loans by close company to directors)

There will therefore be an annual chargeable benefit subject to the above provisions and then a possible further charge on a deemed discharge of the notional loan in certain circumstances - see ERSM70140.

Aggregation with other beneficial loans

The notional loan is aggregated with other real beneficial loans for these purposes.

Threshold for annual charge

Where the total of such loans does not exceed £10,000 there is a de minimis exemption under ITEPA03/S180. (Prior to the tax year 2014/15 the limit was £5,000.)

Deemed annual benefit of loan treated as earnings

The employee is deemed to be in receipt of income equal to the “official rate of interest” (see EIM26104) on the loan as prescribed by HMRC under Treasury regulation.

See EIM26101 et seq. for full details as to computation of annual benefit.

See ERSM71040 for the method of computing the annual charge under the pre-16/4/03 regime, which remains unchanged.

Annual charge linked to employment

Any annual charge imposed under the benefits code on a notional loan will cease when the employee ceases his/her employment. However, the notional loan continues in existence and there may be a charge on ‘discharge of notional loan’ (see ERSM70140) at a later date after cessation of employment or going abroad (see ERSM70424).