ERSM30420 - Restricted Securities

Schedule 22, FA 2003: calculation of charge: simple examples

The principles of the formula (see ERSM30400) can be illustrated with a simple example:

Example 1 – share price increases

A restricted security is given to John Coombs when its restricted market value is 75p.

If it were unrestricted its value would have been £1.

The restriction lifts when unrestricted MV is £5.

The employee is charged on 75p on acquisition, and at that time 25% of the share value has not be taxed.

Therefore on the lifting of the restriction there is a charge on

£5 x 0.25 (or 25%) = £1.25.

The share is worth £5 and the employee has paid tax on £2 (75p on acquisition and £1.25 on the lifting of the restriction. The other £3 in growth is capital subject to CGT but not Income Tax.

Even if the share price goes down there is still, potentially, a charge under chapter 2.

Example 2 – share price decreases

Sara Collings is given restricted shares with an actual market value of 70p, and an unrestricted market value of £1.

The restriction is lifted at a time when the unrestricted market value has fallen to 60p.

Tax is paid on acquisition of the shares, based on the actual market value of 70p (70% of £1).

When the restriction lifts, the charge is on 30% of whatever the market value is at that time (whether it is higher or lower). In this case, the liability will be on 30% of 60p (18p).

Conceptually, it is useful to think of the employee as receiving a share in two instalments:

• firstly, in 70p worth of restricted share, which unfortunately declines to 42p (70% of 60p) and,
• secondly, in 30% of the share received at a later date (when the restriction is lifted), when it is worth 18p (30% of 60p).

So, if the shares were then sold for 60p the employee would have a capital gains tax loss on disposal of 28p, calculated by deducting from the sale price of 60p the ' cost ', being equal to the two charges to income tax of 70p + 18p.