What are restricted securities?
What are restricted securities?

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

  • What are restricted securities?
  • Definition of restricted securities and restricted interest in securities
  • First category of specified restrictions: forfeiture provision
  • Second category of specified restrictions: restricted rights of holder
  • Third category of specified restrictions: potential disadvantage
  • Commercial purpose for provision—UBS AG and DB Group Services (UK) Limited
  • Public companies
  • Exclusions from restricted securities

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?

Restrictions are often intended to incentivise an employee 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 National Insurance contributions (NICs) charges) 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 disposal of the restricted securities.

However, it is possible for the director or employee and the employing company to jointly elect for an alternative tax treatment

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