ERSM70140 - Securities Acquired for less than Market Value

Notional loan: discharge

The notional loan is treated as discharged under section 446U when

1. the employment-related securities are disposed of (unless this is to an associated person); or disposal of securities by that associated person to a non-associated person.
   
2. any outstanding or contingent liability to pay for partly-paid securities (or an interest in securities) is released, transferred or adjusted so that an associated person is no longer bound to pay it; or
   
3. something that affects the securities is done on or after 2 December 2004 as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions.

For an explanation of “associated person” see ERSM20250.

If the loan is discharged as a result of one of the events above then the amount of the notional loan outstanding immediately before the event counts as employment income for the relevant year.

See ERSM70400 for the effect of residence status on liability.

The relevant tax year is the year that the loan is treated as discharged.

Non-taxable discharges of notional loan

The notional loan can also be treated as discharged when;

4. payments of amounts outstanding for the securities are made by an associated person equal to the amount initially outstanding; or
   
5. the employee dies.

In neither of these circumstances will there be any employment income arising.

Disposal of forfeitable securities

The acquisition of securities that are subject to a risk of forfeiture (which fall within ITEPA03/S425 (2)) will not be treated as creating a notional loan under Chapter 3C at the time of acquisition, per ERSM70100, but neither are they likely to be so treated on lifting of the restriction in normal circumstances (i.e. there is no partly-paid element).

Providing the employee is ordinarily resident in the UK, Chapter 2 (restricted securities) applies to the disposal of forfeitable securities. So where:

• the gain is properly charged to tax and NIC under Chapter 2,
• there is no partly-paid element or outstanding purchase price, and
• provided avoidance is not involved,

Chapter 3C (on acquiring securities at less than market value) will not be applied.

Disposal of partly-paid shares

Where partly-paid shares are sold for their market value taking into account the potential call on them, the amount of the notional loan equal to the call is still chargeable even though this obligation is taken over by the purchaser of the shares. See Example 3 in ERSM70120.

Example: discharge of notional loan – CG computation

In 2005/6 Yvonne Mayor acquires 10,000 ordinary shares with fully paid up market value of £10,000. Her employer allows her to pay 10p per share, leaving outstanding a call of 90p per share. Mayor pays tax on the notional loan of £9,000 each year and in 2010/11 sells the shares, still partly-paid, for £5,000.

The sale of the shares constitutes a discharge of the notional loan of £9,000, which is charged as earnings from employment for 2010/11 under ITEPA03/S446U.

The CGT computation on disposal will be on the following lines: