ERSM30400 - Restricted Securities: Calculation of charge
The taxable amount is the increase in value on the proportion of the security remaining untaxed, rather than the full increase in value. So if 70% of the unrestricted value has been taxed on acquisition of the restricted security, only 30% of its later higher value will be taxed when the restriction is lifted.
To calculate the taxable amount on each occasion of a chargeable event a formula has been devised:
Taxable Amount = UMV x (IUP - PCP - OP) - CE, where
UMV (Unrestricted Market Value) is the market value of the securities immediately after the chargeable event assuming there were no restrictions on the securities.
IUP (Initial Uncharged Proportion) is the Initial Unrestricted Market Value (that is the initial market value ignoring any restrictions), less any Deductible Amounts (any consideration paid or charged to income tax by virtue of other provisions), divided by the Initial Unrestricted Market Value.
| IUP = | IUMV - DA | |
| IUMV |
The way this part of the formula works is to find the proportion of the initial value that has been paid for or charged to tax (in respect of which any future growth will be a capital matter) and the proportion of the initial value that has not been paid for or charged to tax (in respect of which an income tax charge is still needed).
For example, assume that a share has an unrestricted market value at the time of acquisition of £100. The restrictions reduce the market value of the share to £75, and the employee pays £75 for the share (the consideration). IUMV will be £100 and DA will be £75 (under ITEPA03/S428(7)(a)). IUP will therefore be:
| 100 - 75 | = 0.25 | |
| 100 |
PCP (Previously Charged Proportion) is calculated by deducting from the Initial Uncharged Proportion any Previously Charged Proportion and any Outstanding Proportion, in relation to the previous chargeable event (if there has been any).
Where the event being considered is the first chargeable event after acquisition PCP will be zero.
PCP = IUP - PCP - OP
OP (Outstanding Proportion) is calculated by taking the Unrestricted Market Value and deducting the Actual Market Value (this is the Actual Market Value immediately after the chargeable event) divided by the Unrestricted Market Value.
| OP = | UMV - AMV | |
| UMV |
This effectively finds the proportion of the share value that is still reduced by restrictions.
See ERSM30415 for further discussion.
CE (Consideration & Expenses) is any amount paid in respect of, or expenses incurred in connection with, the lifting or variation of the restrictions.
Following Finance Act 2011, CE includes any amount that has counted as employment income of the employee under Chapter 2 of Part 7A ITEPA 2003 in relation to a ‘relevant step’ (see EIM45070) taken before the chargeable event occurred. (ITEPA03/S428(6A))
DA (Deductible Amounts) are:
- The amount of any consideration given for the employment related security.
- Any amount that constituted earnings from the employee’s employment in respect of the acquisition of the employment-related securities (but not including income that is exempt).
- Any amount that counted as employment income in respect of the employment-related securities under Chapter 2 or 4 of Part 7 as originally enacted.
- If the employment related securities were acquired on a conversion of other employment related securities then any amount that counted as employment income on such conversion, in relation to the legislation as currently and previously enacted.
- If the employment related securities were acquired pursuant to a securities option, any amount that counted as employment income under ITEPA2003/S476 (or section 476 or 477 as originally enacted).
Where restricted securities also carry rights to convert into other securities then the market value of the securities is to be the value ignoring those conversion rights (ITEPA2003/S428 (8)).
