ERSM110930 - Securities Options

Earn-outs: restricted securities

Where securities, forming an earn-out:

• are received directly in exchange for 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 value of the securities acquired under the earn- out itself.

Where a securities option earn-out leads to the acquisition of restricted securities, the same treatment in computing IUP at the time the restrictions are lifted will be applied.

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 The provision was repealed with effect from 2 December 2004 by F(No 2)A 2005.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 earnings under Chapter 2 Part 7 ITEPA 2003 and has no bearing on the rules for Capital Gains Tax.