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HMRC internal manual

Employment Related Securities Manual

Securities acquired for less than market value: old regime: computation of notional loan: examples

Example 1: notional loan

Andy Stirling acquires 10,000 shares. The market value of fully paid-up shares of the same class is £1 per share. The shares are issued to Andy partly-paid. He is only required to pay 20p per share and the company reserves the right to call up the remaining 80p at a future date, which may or may not be specified.

The undervalue on acquisition is 10,000 x 80p = £8,000.

The under-value of £8,000 is treated as an interest-free loan and the tax charge in respect of it is calculated as set out in EIM26200. The benefit on which tax is paid is the interest that would have been payable by Andy if he had to pay interest on the notional loan at the official rate for the tax year concerned.

Example 2: reduction in notional loan

On 1 January 2003 Tony Thomas acquires 5,000 shares in the company that employs him. The shares are acquired under the terms of the company’s share incentive scheme and so are acquired in pursuance of an opportunity available by reason of Tony’s employment. The market value of the shares at the acquisition date is £7 per share. Tony pays £3 per share at 1 January 2003 and the terms of the scheme require him to pay a further £2 per share both on 1 January 2004 and on 1 January 2005.

The undervalue on acquisition is

5,000 X £7 = £35,000
less 5,000 X £3 = £15,000
Undervalue £20,000

The original notional loan is £20,000. The cash equivalent of the benefit of the loan for the year ended 31 December 2003 is, assuming an official rate of interest of 5 per cent, £1,000.

For 2002/3 there is a potential employment income charge, time apportioned from 1/1/03 to 5/4/03, on 1/4 of £1,000 = £250, because the loan is held only for three months of the year. This amount should be returned both on the P11D and on Tony’s self assessment return.

On 1 January 2004 Tony pays a further £10,000 and the notional loan is therefore reduced to £10,000.

For 2003-2004 the cash equivalent of the benefit is 3/4 of £1000 + 1/4 of £500 = £825. P11D and self assessment return are needed for this year as well.

On 1 January 2005 Tony pays a further £10,000 thereby terminating the notional loan.

For 2004-2005 there is a potential charge on a cash equivalent of 3/4 of £500 = £375. As the loan of £10,000, which was in existence at the beginning of the year, was above the de-minimis limit of £5,000 this amount should also be included in P11D and self-assessment.