PT 44 & 45 Restricted Securities & Special Rules Flashcards
Where shares are awarded to an employee but subject to forfeiture at less than market value, what do you need to check?
You need to check whether the forfeiture restriction will cease within 5 years.
Where shares are subject to forfeiture within 5 years following the award, what does this mean?
There’s no charge to tax at the time of issue
Where shares are subject to forfeiture after 5 years following the award, what does this mean?
There is a charge to tax based on the restricted market value of the shares at the date of the award.
A further charge will arise when the risk of forfeiture is lifted.
Where shares are subject to other (non forfeiture) restrictions what does this mean?
There’s a charge to tax at the time of issue based on the restricted market value of the shares at the time of the award.
When share restrictions are lifted, what then?
The charge to tax is a percentage of the market value of the shares immediately after the restriction is lifted.
You need to work out what percentage of the total unrestricted value at the time of issue the unrestricted part was.
Any elections?
Yes, an election can be made for the exemption on acquisition not to apply. Tax will then be charged as for the situation where the forfeiture restriction continues for more than five years.
Alternatively an election can be made to ignore the impact of all restrictions and tax the employee on the full unrestricted value of the shares at the date of acuistion. In this case no charge arises when the restriction is lifted.
What are the conditions of the elections?
- irrevocable
- must be made within 14 days
- joint election between employer and employee
What’s the capital gains impact?
The base cost of the shares is the amount paid by the employee for the shares plus any amounts taxed as employment income.
What does the employer need to do?
Make a return online by 6 July following the tax year where there is a reportable event.
What about if restricted securities are exchanged for new restricted securities (for example the takeover of a company)
the disposal of the original securities is not usually a chargeable event. An income tax charge will arise when the restriction on the new securities is lifted.
What about convertible restricted securities?
Two charges to income tax may arise. Firstly when the shares are initially acquired and secondly when the shares are converted or disposed of for consideration.
The charge on acquisition is the MV as if not convertible
The charge on conversion is the difference between the vale immediately after conversion and the value immediately before conversion.
Explain non-commercial actions
A charge will arise where the market value of employment-related securities has been increased or decreased by non-commercial actions. These rules prevent the avoidance of tax by employers seeking to manipulate the share price to avoid a liability. Increases / decreases of under 10% are ignored.
Explain a notional loan
A notional loan will arise where employment related securities are acquired by an employee for consideration but there’s a delay in paying. Taxable benefit will arise on amount borrowed @ HMRC’s ORI (2%)
Restricted Securities - Exemptions
Securities cease to be employment related securities on death of employee. Therefore chargeable events after death do not give rise to an income tax charge.
Securities cease to be employment related securities seven years after cessation of employment. However 7 year rule doesn’t apply to the exercise of share options.
