Why make a section 425 election (or no election) rather than a section 431 election?
Why make a section 425 election (or no election) rather than a section 431 election?

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

  • Why make a section 425 election (or no election) rather than a section 431 election?
  • Factual background
  • Scenario 1—shares increase in value
  • Scenario 2—shares remain at the same value
  • Scenario 3—shares decrease in value
  • Restricted securities tax treatment without any election
  • Restricted securities tax treatment with an election under ITEPA 2003, s 425(3)
  • Restricted securities tax treatment with an election under ITEPA 2003, s 431(1)
  • Which election or no election?
  • Impact on subsequent capital gains computation
  • More...

This practice note sets out the key considerations and illustrative computations for determining whether to elect under section 425 or section 431 of the Income Tax (Earnings and Pensions) Act 2003 (or to make no election at all) upon the acquisition of restricted securities. For further background, see:

  1. What are restricted securities?

  2. Restricted securities—tax treatment and joint elections, and

  3. Guidance on making a valid restricted security election

The question of whether to make a section 425 or section 431 election (or no election at all) is considered in the context of the following example.

Factual background

An incoming director of a private company pays £100 to subscribe for 100 shares in the company (at nominal value) offered to him as a 'golden hello'. If, within five years of the acquisition, the director fails to meet certain performance conditions, resigns voluntarily or is dismissed (including for, but not limited to, misconduct), the director must transfer his shares to a designated shareholder for an amount equal to the subscription price.

The income tax treatment (under the restricted securities regime in ITEPA 2003, Pt 7, Ch 2) and associated National Insurance contributions (NICs) treatment upon acquisition of the shares, and when the shares cease to be restricted after five years, is compared and contrasted below in three scenarios in which the shares have different valuations over the course of ownership

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