ERSM30415 - Restricted Securities

Schedule 22, FA 2003: computation of OP

Where a restricted security is sold there have been concerns as to how OP is computed in the formula under ITEPA03 S428. In particular, whether AMV varies according to the circumstances of disposal, even though a restriction remains immediately prior to disposal.

Where there is a single chargeable event on sale following acquisition, the outstanding proportion (OP) is deducted from the initial uncharged proportion (IUP) to compute the factor which determines the proportion of unrestricted market value (UMV) charged to tax. OP is computed using the formula

where AMV is actual market value immediately after the disposal, taking remaining restrictions into account. This feeds into the computation so that:

• where the restriction remains unchanged at sale, OP is likely to equal IUP, thus giving a nil charge;
• where it is effectively lifted, the proportion represented by IUP will be charged; and
• where part of the restriction has wasted away over time there will be a charge based on IUP – OP.

The price paid for a share will generally reflect whether the restriction remains, except where, for example, there is forfeiture at less than market value.

Where a third party purchaser buys the share or there is a pre-emptive sale to a director, the acquirer is likely to be acquiring it with the restriction, so little difficulty will arise.

In certain situations whether a restriction applies may be academic. The price paid may be UMV, the restriction no longer applying, or it might be a lower figure, reflecting the existing restriction. In the following circumstances, HMRC will accept an OP based on whether the sale price reflects a continuing restriction:

• Where the share is acquired by a founder shareholder.
• Where the share is bought back by the employing company and cancelled.
• Where the share is taken up by an employee benefit trust (EBT) on behalf of the employer.