Restricted securities—tax treatment and joint elections

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Restricted securities—tax treatment and joint elections
  • Tax treatment of acquiring restricted securities
  • Special rule on acquiring restricted securities
  • Section 425 (or 431) election
  • Tax treatment of restricted securities on chargeable event
  • What is a chargeable event?
  • Taxable amount on chargeable event
  • Example
  • Deductions from taxable amount on chargeable event
  • Reduction on disposal for less than market value
  • More...

Restricted securities—tax treatment and joint elections

The rules applying to directors and employees in relation to restricted securities contained within Chapter 2, Part 7 of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) are commonly encountered in practice on corporate transactions involving management.

Restricted securities are, broadly, employment-related securities which:

  1. at the date of acquisition

  2. are subject to identifiable restrictions

  3. that reduce the value of the securities

For the definition of employment-related securities, see Practice Note: What is an employment-related security?

For a detailed explanation of the definitions of restricted securities and restricted interests in securities, see Practice Note: What are restricted securities?

Restrictions are often intended to incentivise an employee or director to remain with the employing company and meet certain performance conditions. The restrictions may affect an employee's ability to retain shares (for example, the articles of association may oblige an employee to transfer shares to 'permitted transferees' on the occurrence of certain events such as resignation), or the general rights attaching to the shares (for example, restrictions on transfer, dividend rights or voting rights).

Restrictions typically have the effect of reducing the market value of employment-related securities (and hence any income tax and NICs charge) upon acquisition. Where the rules apply, further income tax (and possibly NICs) charges can arise on subsequent chargeable events, including the lifting, variation or expiry of the restrictions, or

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