ERSM20250 - Employment-related Securities and Options

Associated person and 'the box'

The term “associated person” is used throughout the legislation. Any person who acquires a security by reason of another’s employment is associated with the employee for these purposes, as is any other person connected with either that person or the employee. That group of people can be thought of as within a “box”.

Various chargeable events can occur when disposing of the securities. The aim of the legislation is to charge when the securities are sold outside the box to a genuine third party. Hence the disposal charges are phrased along the lines of “disposal otherwise than to another associated person”. Of course, the employee is also an “associated person”.

Disposal outside “the box”

When the securities are disposed of outside the “box” they cease to be within the provisions of Chapters 2 to 4A (subsection (5) of ITEPA03/S421B).

Associated person

The definition of “associated person” is set out in ITEPA03/S421C as:

• the person who acquired the employment-related securities on the acquisition,
• (if different) the employee, and
• any relevant linked person.

Relevant linked person (from 18 June 2004)

A person is a “relevant linked person” if-

• that person (on the one hand), and
• either the person who acquired the employment-related securities on the acquisition or the employee (on the other),

are or have been connected or (without being or having been connected) are or have been members of the same household (see ITEPA03/S421C (2)).

The broad coverage of “household” is intended to include modern personal relationships beyond the traditional family within marriage.

Relevant linked person (before 18 June 2004)

Before 18 June 2004, a “relevant linked person” was:

• that person (on the one hand), and
• either the person who acquired the employment-related securities on the acquisition or the employee (on the other),

are connected or, although not connected, are members of the same household.

The difference is that the earlier definition was in the present tense. The wording was taken advantage of in avoidance schemes. Under the new wording: once connected, always connected.

Exception for employing company

A company which would otherwise be a relevant linked person is not, per ITEPA03/S421C (3), if it is-

• the employer,
• the person from whom the employment-related securities were acquired,
• the person by whom the right or opportunity to acquire the employment-related securities was made available, or
• the person by whom the employment-related securities (or the securities in which they are an interest) were issued.

So, if the employer buys back the securities that will be a disposal to a non-associated person for tax purposes.