ERSM20190 - Employment-related Securities and Options
Contracts for differences
The definition of security includes rights under contracts for differences or contracts similar to contracts for differences (other than contracts of insurance) (see ITEPA03/S420 (1)(g)).
Per ITEPA03/S420 (4), a contract similar to a contract for differences is a contract
- which is not a contract for differences, but
- the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the value or price of property or an index or other factor designated in the contract.
Some incentive schemes involve payment of future bonuses based on the increase in share price over the life of the scheme. Such schemes are sometimes referred to as “phantom shares schemes”. In certain circumstances, where such a right is a contract for differences, it will be covered by the legislation in Part 7, ITEPA 2003.
However, where the right is an option, it will be excluded from the definition of a security. It could be drafted as a future right to cash or shares or a combination of both. If there is a right to acquire shares any gain will be covered by the provisions in Chapter 5 on securities options. Where there is simply a cash bonus at the end (however it might be calculated) we will not treat the right itself as a security provided the cash received is fully charged to tax and NICs on receipt. The majority of cases are likely to receive this treatment.
