When an earn-out takes the form of a right to acquire securities
at some time in the future subject to conditions, it will, for the
purposes of Chapter 5, be a securities option. However, where the
purchaser of a company has the choice of paying the earn-out in
cash or securities, then it will not be a securities option.
Employees in receipt of such securities options may continue
to work for the business or cease their employment. Employees who
continue to work for the business will have acquired a securities
option from their prospective employer and ITEPA03/S471 (3)
deems this to be 'by reason of employment'. Employees who cease to
work at the time the business is sold may also be deemed to have
acquired an employment-related securities option by virtue of
ITEPA03/S471 (4).
For both categories there will be a potential liability to
Income Tax and NIC on the receipt of the earn-out securities.
However, where it can be shown that the earn-out is further
consideration for the disposal of securities rather than value
obtained by reason of employment, the value of securities exchanged
for the earn-out will be taken to be equal to the value of the
securities acquired under the earn-out itself. There will then be
no liability to Income Tax arising.
This guidance is only applicable to the computation of
earnings under Chapter 5 Part 7 ITEPA 2003 and has no bearing on
the rules for Capital Gains Tax.
