ERSM110930 - Securities Options: earn-outs: restricted securities

Where securities, forming an earn-out:

  • are received directly in exchange for employment-related securities in the old company,
  • are forfeitable in line with the provisions in ITEPA03/S423 (2), and
  • vest only if certain performance conditions related to the business are met,

they will be employment-related securities by reason of being exchanged for other employment-related securities (ITEPA03/S421D (2)) and potentially there will be a charge under ITEPA03/S426 because they carry restrictions.

Where it can be shown that the earn-out is further consideration for the disposal of securities rather than value obtained by reason of employment, the value of securities exchanged for the earn-out will be taken to be equal to the unrestricted market value of the securities acquired under the earn-out itself.

By way of further clarification, up to 1 December 2004 loan notes received are not ‘restricted securities’ within Chapter 2 Part 7 ITEPA 2003 by reason only that loan notes are redeemable (ITEPA03/S424 (c)). The provision was repealed with effect from 2 December 2004 by F(No 2)A 2005.

This guidance is only applicable to the computation of employment income under Chapter 2 Part 7 ITEPA 2003 and has no bearing on the rules for Capital Gains Tax.