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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: discharge of notional loan up to 16 July 2014

Discharge of notional loan

The notional loan is treated as discharged under section 446U when

the employment-related securities are disposed of (unless this is to an associated person). From 17 July 2014, this rule is subject to a fundamental exception. See ERSM70150.

any outstanding or contingent liability to pay for partly-paid securities (or an interest in securities) is released, transferred or adjusted so that an associated person is no longer bound to pay it; or

something that affects the securities is done on or after 2 December 2004 as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions.

For an explanation of “associated person” see ERSM20250. If the loan is discharged as a result of one of the events above then the amount of the notional loan outstanding immediately before the event counts as employment income for the relevant year.

See ERSM70400 for the effect of residence status on liability.

The relevant tax year is the year that the loan is treated as discharged.

Non-taxable discharges of notional loan

The notional loan can also be treated as discharged when;

payments of amounts outstanding for the securities are made by an associated person equal to the amount initially outstanding; or

the employee dies.

In neither of these circumstances will there be any employment income arising.

Disposal of partly-paid shares

Up to 16 July 2014, where partly-paid shares are sold for their market value taking into account the potential call on them, the amount of the notional loan equal to the call was still chargeable even though this obligation was taken over by the purchaser of the shares. See Example 3 in ERSM70120.

See ERSM70150 for the treatment of the disposal of shares that were acquired partly-paid from 17 July 2014.

Example: discharge of notional loan - CG computation prior to 17 July 2014

In 2005/6 Yvonne Mayor acquires 10,000 ordinary shares with fully paid up market value of £10,000. Her employer allows her to pay 10p per share, leaving outstanding a call of 90p per share. Mayor pays tax on the benefit of the notional loan of £9,000 each year and in 2010/11 sells the shares, still partly-paid, for £5,000.

The sale of the shares constitutes a discharge of the notional loan of £9,000, which counts as employment income for 2010/11 under ITEPA03/S446U.

The CGT computation on disposal will be on the following lines:

Disposal proceeds £5,000
Cost (£1,000)
Chapter 3C charge on discharge of notional loan TCGA92/S119A (3)(c) (£9,000)
CGT loss (£5,000)