Election for share value to ignore restrictions

If shares are acquired because of an individual’s employment, they are liable to an income tax charge on the difference between the market value of the shares and the price paid by an employee, but special rules can apply where the shares have restricted rights. Use this election to have the restrictions ignored for determining the market value of the shares.

Restricted

Anti-avoidance measures apply to deal with so-called restricted securities for employees. As the name suggests, they are securities (including shares) which are subject to restrictions. For example, employees are required to sell the shares if they leave their employment or are prevented from selling the shares to whoever they like.

Restrictions like these affect the open market value of the shares as they make them generally less attractive from a buyer’s perspective. Because the income tax charge on acquisition is based on market value, anti-avoidance provisions make sure no advantage can be gained by deliberately putting restrictions on shares, then lifting them to create a capital gains tax rather than an income tax charge. The legislation imposes a tax charge every time a restriction is lifted. As a result, if the shares have grown in value, it can mean more tax is eventually payable than if the shares didn’t include the restriction.

It is possible for the employee and the employer to jointly elect under s.431 Income Tax (Earnings and Pensions) Act 2003 to ignore the restrictions for tax purposes when the shares are acquired, and instead to be taxed on the unrestricted market value of the shares.

How to use

Our s.431 Election for Shares complies with HMRC’s guidance. You should complete and sign a single part B as the employer, and have each employee who is acquiring shares complete and sign a part A. You should also complete the summary sheet on the last page.

Don’t send the election to HMRC; instead keep it on file in case the tax charges are ever questioned. When you complete your year-end share report via the Government Gateway, you will see an option to tick that the shares acquired were subject to an election.

Note. Don’t forget to complete both part A and part B or the election won’t be valid as it can’t be made unilaterally.