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HMRC internal manual

Employment Related Securities Manual

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

The notional loan is to be treated as discharged when the following occurs -

payments or further payments for the employment-related shares equal to the amount initially outstanding have been made,

if the employment-related shares were not fully paid up at the time of the acquisition, any outstanding or contingent obligation to pay for them ceases to bind the employee or any person connected with the employee,

the employment-related shares are disposed of so that neither the employee nor any person connected with the employee any longer has a beneficial interest in them, or

the employee dies - see ERSM20270.

Occasions of charge

There is a charge to tax if a notional loan is discharged as a result of an event specified in (b) or (c) above.

Amount of charge

The amount of the notional loan outstanding immediately before the occurrence of the event is to be treated as earnings from the employment for the tax year in which the event occurs.

Employment deemed to continue after termination

Even if the employment has terminated or has become “lower-paid” (earnings less than £8,500) before the chargeable event the employment is treated as not terminated or having become a “lower-paid” employment”, so that the charge still applies.

Disposal of partly-paid shares

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 is still chargeable even though this obligation is taken over by the purchaser of the shares.

Example: discharge of notional loan

In 2002/3 Ellie Batista acquires 10,000 ordinary shares with fully paid up market value of £10,000. Her employer allows her to pay 10p per share leaving a call of 90p per share outstanding. She pays tax on the notional loan of £9,000 each year and in 2007/8 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discharge of the notional loan of £9,000, which is charged as earnings from employment for 2007/8 under ITEPA03/S195 as originally enacted.

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

Disposal proceeds £5,000
Cost (£1,000)
Section 195 charge on discharge of notional loan (£9,000)
CGT loss (£5,000)