Eileen Baker is given 10,000 partly-paid £1 ordinary shares with an outstanding obligation to pay up 99p on each share if the company calls for it. Fully paid shares are worth £2 each, so partly-paid ones with call of 99p will be worth £1.01 each. Three years later she sells the shares for £20,100 (£2.01 each with the call still outstanding).
Year 1
Money’s worth charge on acquisition of shares 10,000 x
£1.01 = £10,100
Notional loan created equal to call on shares 10,000 x 99p =
£9,900
Annual charge for each year £9,900 @ say 5% = £495
p.a.
Year 3
Even though the call remains outstanding there is a deemed discharge of the notional loan under ITEPA03/S446U equal to its original amount in sum of £9,900
Caroline Cross is awarded £10,000 worth of shares. They will be forfeited if she leaves employment within the following 3 years. Only £1,000 is payable on acquisition, with the remaining £9,000 payable in 5 yearly instalments of £1,800. After 3 years the shares are worth £12,000. Caroline is resident and ordinarily resident in the UK at all times.
Year 1
When the shares are acquired the market value is £10,000. £1,000 is paid on acquisition, with the remaining £9,000 to be paid later. There is therefore no money’s worth charge under ITEPA03/S62, but there is a charge under Chapter 3C Part 7 ITEPA 03. For Chapter 3C purposes, the only deductible amount is the £1,000 paid by the employee, so that the notional loan charge would be calculated on an initial amount of £9,000. However the shares are forfeitable, so there is no charge to Income Tax under ITEPA03/S425. Consequently there is no charge under Chapter 3C until the forfeiture condition lifts by virtue of ITEPA03/S446Q (4).
Year 3
When the forfeiture condition lifts there will be a chargeable
event under ITEPA03/S427 (see
ERSM70100). The original actual market
value is paid or payable in full so the amount of charge computed
under ITEPA03/S428 is nil.
However, not all of the market value at acquisition has been
paid and there is deemed to be a notional loan from the time when
the first chargeable event occurs. The employment- related
securities are deemed to be acquired at that date. Under
ITEPA03/S446T(1) the amount of the notional loan is computed using
the market value at the time of the (deemed) acquisition. So the
‘initial’ amount of the notional loan will be:
| Market value at deemed acquisition | 12,000 | |
| less paid at acquisition | (1,000) | |
| paid year 1 | (1,800) | |
| paid year 2 | (1,800) | |
| paid year 3 | (1,800) | |
| paid under S426 | (nil) | Notional loan = £5,600 |
In Years 4 & 5 the amount charged as a notional loan will
reduce each year as the remaining instalments of £1,800 are
paid, leaving £2,000 outstanding. There may be a continuing
annual charge on this if the aggregated loans and notional loans
limit is exceeded (see
ERSM70130) and there will be a final
charge on £2,000 if the shares are sold (see
ERSM70140).
If the shares had fallen in value by Year 3 then the notional
loan would be extinguished earlier and there would be no charge on
sale of the shares. An election under ITEPA03/S431 (1) at the
time of original acquisition (see
ERSM30450) would not prevent any
Chapter 3C charge, but would bring forward the charging point to
the original acquisition and prevent any increased Chapter 3C
charge should the shares rise in value.
Mr Smith has been offered the opportunity to subscribe for 100,000 restricted (forfeitable) shares in the Company he works for, at an aggregate subscription price of £100,000. The aggregate unrestricted market value of the shares is £150,000 and Mr Smith has decided to enter into a section 431(1) election in order to pay income tax and NICs, up-front, on the difference between the subscription price and the (higher) unrestricted market value of the shares. The Company has agreed that, whilst Mr Smith will be issued with his shares, he does not have to pay the subscription price until the earlier of (a) an exit event (such as a sale or listing) or (b) the cessation of his employment. An election under ITEPA03/S431 (1) has effect for relevant tax purposes per subsection (3) including:
The effect of the election is to bring forward the Chapter 3C charge to the time of acquisition. So there is an ITEPA03/S62 charge on acquisition of the shares on £50,000 (£150,000 less the deferred subscription price of £100,000) and a notional loan of £100,000 created on which there will be an annual charge at the appropriate rate. The amount of the notional loan is determined in accordance with ITEPA03/S446S, being the unrestricted market value of £150,000 less a deductible amount equal to the ITEPA03/S62 charge on £50,000 under ITEPA03/S446S (3)(b). If the subscription price is paid up before sale, this is treated as a discharge or “repayment” of the notional loan under ITEPA03/S446U (4)(a). The annual charge will cease and there will be no further charge. However, if the shares are sold before the payment of the subscription price is made, there would be a charge on £100,000 under ITEPA03/S446U (2). HMRC will accept that where sale and “repayment” of the notional loan are part of one transaction, the “repayment” is treated as being made first.
