The following Employment Tax guidance note Produced by Tolley in association with Ken Moody provides comprehensive and up to date tax information covering:
Restricted securities are shares (or other securities, eg loan notes) that are subject to certain restrictions such as a risk of forfeiture if performance conditions are not met. These restrictions reduce the market value of the securities. If those restrictions are removed, the value of the securities goes up and the holder makes a notional gain and a real gain if the securities are sold.
The rules on restricted securities apply, where:
a person has a right or opportunity through their employer to acquire shares or other securities
those securities are subject to restrictions
those restrictions are lifted or varied or the securities are sold
On acquisition of employment-related securities in general and including restricted securities, the market value of the securities (less any payment made by the employee) is liable to income tax on general principles, ie as ‘earnings’ within ITEPA 2003, s 62. The amount taxable is subject to income tax via the employee’s self assessment return unless the securities are ‘readily convertible assets’, in which case collection is via PAYE and employees’ and employers’ Class 1 NIC are payable. See the Readily convertible assets guidance note.
In these circumstances, it is normal practice for an employee to elect with their employer (by making a section 431 election) to ignore the impact of the restrictions on acquisition in order to stay outside the scope of these rules. The effect of the election is that the valuation of the securities on acquisition ignores the restrictions and may, therefore, be higher than the actual value. Although this can mean that there will be a larger amount taxable as earnings (unless the acquirer pays the full market value ignoring the restriction), future gains arising either as a result of the lifting of the restrictions or as a result of normal growth would be taxable as a capital gain when the shares are disposed of.
A section 431 election simplifies the tax calculations but does not always reduce the
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