Restricted securities

Produced by Tolley
Restricted securities

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

  • Restricted securities
  • Introduction
  • Key considerations
  • When might the restricted securities regime apply?
  • Treatment on issue
  • Further chargeable events
  • Calculation of the amount assessable to income tax on a chargeable event
  • Calculation of initial uncharged proportion
  • Calculation of the previously charge proportion
  • Calculation of the outstanding proportion
  • More...

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.

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.

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

  1. good and bad leaver clauses that determine the price an employee receives on termination of employment

  2. forfeiture of shares if performance conditions are not met

  3. requiring the consent of an investor to any transfer

  4. lock-ins, and

  5. non-dividend bearing shares

Securities with intrinsic restrictions which are not expected to be lifted, for example, a class of non-voting shares, will not necessarily be restricted. Alternatively, if certain holders of shares are restricted from voting, these are likely to be restricted securities.

Further examples of where employment-related securities would not be classed as restricted securities are listed in ITEPA 2003, s 424. See ERSM30350.

Treatment on issue

The legislation introduces

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