ERSM30300 - Restricted Securities

Schedule 22, FA 2003: securities acquired on or after 16 April 2003: introduction

Schedule 22 Finance Act 2003 introduced a new set of rules for taxing restricted shares and securities. The rules cover all restrictions, including the risk of forfeiture.

However, as with the earlier special rules, these rules only apply where the employee is resident and ordinarily resident in UK (old Case I of Schedule E, see SE40101).

For Chapter 2 to apply the securities must be restricted at the time they are acquired. If an employee acquires unrestricted shares and restrictions are later placed on the shares then Chapter 2 will not apply.

The reason for this is that the employee will have paid the full market value for the unrestricted shares (or been taxed on that value). If the value is then later reduced by the imposition of restrictions this is a capital gains matter and no income tax relief is given for the reduction in value. There is therefore no reason to impose a charge to income tax if there is a later increase in value should the restriction be removed.

The new rules involve:

• Defining what is a restricted security.
• Relief from initial charge where the securities are potentially forfeitable within 5 years.
• Chargeable events on the lifting or varying of restrictions and on disposal of securities.
• Computation of gains based on formula.
• Various exemptions.

Initial charge on acquisition of restricted securities

Where restricted securities are acquired for less than their actual market value, taking account of the restrictions, an intitial money’s worth charge arises under ITEPA03/S62 on the actual market value less any consideration paid (see ERSM20500 for further guidance on the moneys worth charge).

There are special rules relating to the acquisition of forfeitable securities, see ERSM30320.

Employees, not both resident and ordinarily resident in UK

For employees who are not both resident and ordinarily resident in UK, the normal charge on acquisition under section 62, based on the restricted market value, will apply. When the restriction is lifted a charge on the increase in value will only arise where the increase in value does not arise from a genuine commercial purpose.

If the lifting of the restriction is part of a tax avoidance scheme to exploit the fact that the rules in Chapter 2 Part 7 ITEPA only apply to R/OR employees, then a charge may arise under Chapter 3B.