Restricted securities

By Tolley
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The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Restricted securities
  • Introduction
  • Key considerations
  • Calculation of the amount assessable to income tax on a chargeable event
  • Benefits and risks of entering into an ITEPA 2003, s 431 election
  • Other possible elections
  • Establishing the unrestricted market value (UMV) for the shares
  • Tax treatment and reporting requirements

Introduction

The application of the restricted securities legislation is complex. This guidance note summarises the key tax implications and looks at some of the practical issues for employers in analysing and handling the potential risks associated with the acquisition of restricted securities by employees and directors in private and unlisted public companies.

The definition of securities is found within ITEPA 2003, s 420. It includes, amongst other things, shares (the most common type of security issued in a private company and the focus of this guidance note), loan stock, warrants and units in a collective investment scheme.

ERSM20110
Key considerations
When might the restricted securities regime apply?

The restricted securities regime is most likely to be relevant where a director or employee acquires shares at less than market value (disregarding any restrictions on the shares) which are subject to compulsory transfer arrangements. For example, the director / employee is required to sell the shares on leaving the employment for less than their market value at that time.

Restrictions are not limited to those contained in the company’s Articles of Association. They can also include restrictions contained in any “contract, agreement, arrangement or condition”. For example, restrictions contained in shareholders agreements would be caught under the legislation.

ITEPA 2003, s 423; ERSM30310

Restrictions of any nature are covered if their effect is to decrease the market value of the shares. They include:

  • good and bad leaver clauses that determine the price an employee receives on termination of employment
  • forfeiture of shares if performance conditions are not met
  • requiring the consent of an investor to any transfer
  • lock-ins, and
  • non-dividend bearing shares

Securities with intrinsic restrictions which are

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