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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: discharge from 17 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), except that disposal of the securities does not result in the discharge of the notional loan if, at the time the securities were acquired, there was an actual or contingent liability to make one or more further payments equal to the amount of the notional loan initially outstanding - as determined by ITEPA03/S446T(1).
  • any outstanding or contingent liability to pay for the securities (or an interest in securities) is released, extinguished, transferred or adjusted so that an associated person is no longer bound to pay it; or
  • something that affects the securities is done 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.

The exception to the rule that disposal of securities results in the discharge of the notional loan means that, from 17 July 2014, the disposal of shares acquired by way of the two most commonly-encountered types of arrangements that fall within Chapter 3C - the acquisition of partly-paid shares and acquisitions where all or part of the purchase price is left outstanding - no longer gives rise to employment income under that Chapter. For those arrangements, ignoring things done for tax avoidance purposes, employment income now only arises under Chapter 3C if the liability is released, transferred, etc.

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 for the securities, equal to the amount initially outstanding, are made by an associated person;
  • (from 17 July 2014) the securities, together with the liability to make those payments, are disposed of (not to an associated person) for consideration of an amount that reflects the transfer of the liability; or
  • the employee dies.

In none of these circumstances will there be any employment income arising.

Disposal of shares with outstanding payment obligations

From 17 July 2014, the disposal of shares that were acquired with an obligation to make a payment or further payment after the acquisition does not give rise to a charge under ITEPA03/S446U(2). If the shares are sold and the liability to make payments is sold with them (and reflected in the sale consideration), then the notional loan is treated as discharged in a way that does not give rise to a charge. If the shares are sold but the liability to make payments remains with the employee (or another associated person), then the notional loan continues unless and until it is discharged either by the liability being released, etc., giving rise to employment income, or by being paid off, or by the death of the employee, neither of which will give rise to employment income.

Disposal of partly-paid shares

From 17 July 2014, the disposal of shares that were acquired partly-paid does not give rise to a charge under ITEPA03/S446U(2). If the shares are sold together with the actual or contingent liability to pay them up, and that is reflected in the consideration received for the, then, under ITEPA03/S446U(4)(aa), the notional loan is treated as discharged in a way that does not give rise to a charge.

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

In 2009/10 Yvonne acquires another 10,000 ordinary shares with fully paid up market value of £10,000. Her employer again allows her to pay 10p per share, leaving outstanding a call of 90p per share. She pays tax on the benefit of the notional loan of £9,000 each year and in September 2014 sells the shares, still partly-paid, for £5,000. If they were fully paid-up, they would be worth £14,000.

The sale consideration for the shares reflects the unpaid amount of £9,000, so that the notional loan is treated as discharged and does not give rise to an income tax charge under ITEPA03/S446U, by virtue of subsection (4)(aa).

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) (nil)
CGT gain £4,000