Guidance

HS305 Employment-related shares and securities — further guidance (2024)

Updated 6 April 2024

This helpsheet supplements the Additional information notes. It deals with some less common circumstances giving rise to tax liabilities relating to the award or ownership of employment-related securities. Unless otherwise indicated, you will need to include all taxable amounts in the amount reported in box 1, ‘Share schemes’ section, on page Ai 2 of the Additional information pages.

Employment-related securities are securities you acquired because of your employment, when your employer (or someone connected to your employer) gave you (or another person) an opportunity to acquire them. The most commonly provided securities are:

• shares in a company (wherever incorporated) or in an unincorporated body constituted under the law of a country or territory outside the United Kingdom (UK)

• debentures, loan stock, bonds and other debt instruments

There are other types of securities. If you need more information refer to the Employment Related Securities Manual and the Employee Tax Advantaged Share Scheme User Manual (ETASSUM).

The notes and working sheets that follow will help you work out the taxable amount on the exercise of share options, or on shares you get free or cheaply, because of your employment or other taxable events for employment-related securities.

You only need to complete the ‘Share schemes’ box, box 1 on page Ai 2 if:

• your employer has not deducted tax from the whole of the taxable amount

• your employer tells you that the valuation used to arrive at the taxable amount for PAYE, was lower than it should have been — the taxable amount which has not had tax deducted due to this difference should be entered in the ‘Share schemes’ box 1

The amount that has already had tax deducted is dealt with as below.

You do not complete the ‘Share schemes’ box for taxable amounts which your employer has fully taxed. Normally these amounts are already included in your P60 (or, where you’ve left employment, P45) which are included in the Employment pages.

Exceptionally, if you receive a taxable amount from the exercise of options, or for employment-related securities after you’ve been given your P45, you will get a separate notification of the taxable amount and tax deducted from your employer. You should include these amounts in the Employment pages.

If you’ve entered into a formal National Insurance contributions (NICs) election to meet employer’s NICs due on the exercise of an option or on the acquisition of certain types of shares, you can deduct the employer’s NICs you’ve paid in calculating the tax due. If you’ve entered into a NICs agreement instead, you can only deduct the NICs you paid to your employer before 5 June following the tax year in which the relevant share transaction occurred.

If you’re subject to the remittance basis for income from employment-related securities (‘securities income’), your employer may have deducted tax from only a part of the securities income. The rules are complex. You should refer to the residence, remittance basis etc notes and the International section of the Employment Related Securities Manual for guidance.

HM Revenue and Customs (HMRC) may check the details used by your employer to calculate the taxable amount and tax due. If an error is discovered, you may have to pay more tax.

Fill in a working sheet for each taxable event and put the total figure (excluding any amount included on the Employment pages) in box 1. Keep the working sheets in case HMRC ask to see them.

You can get information to help you work out the taxable amount to enter in box 1 from the working sheets and notes that follow.

You will need supporting information, such as option certificates and exercise notices, from the company whose securities are involved; your employer may also be able to help.

Tax advantaged share schemes

Schedule 2 share incentive plan

You will be chargeable to tax (use working sheet 1) if the shares you bought, or were awarded, cease to be subject to the plan within 5 years of their purchase or award.

The amount chargeable to Income Tax depends on how long the shares were held in the plan. If the shares were in the plan for:

• fewer than 3 years, the taxable amount is equal to their market value on the date they cease to be subject to the plan

• at least 3, but fewer than 5 years, the taxable amount is the market value of the shares when they ceased to be subject to the plan or, if lower, their market value at the date they were awarded or bought for you

You will not be chargeable to tax if your shares cease to be subject to the plan because you ceased employment for one of the following reasons:

• injury or disability

• redundancy

• a change of employment under the Transfer of Undertakings (Protection of Employment) (TUPE) Regulations 2006

• a change in the control or sale of the company you work for out of the group

• retirement

• death

If the shares are subject to forfeiture, there’s no charge to Income Tax when they become forfeit.

Complete working sheet 1 for each taxable event.

Dividend Shares

For dividend shares (shares bought with dividends arising on other shares within the plan and reinvested in the tax advantaged plan) you will be chargeable to tax if they cease to be subject to the plan within 3 years of their purchase.

If dividend shares cease to be subject to the plan within 3 years of acquisition and for a reason that is not listed above the amount of the dividend used to buy the shares should be included in box 4 in the dividend boxes on page TR 3 of your tax return for the year the shares cease being part of the plan.

Schedule 4 Company Share Option Plan (CSOP)

You will not be taxable on the grant of an option.

You will not be chargeable to Income Tax if you exercise your options at a time when the scheme remains tax-advantaged (‘a Schedule 4 CSOP Scheme’) and:

• the exercise occurs between 3 and 10 years from the date of grant

• where the plan rules allow, you cease employment within 3 years of the date of grant and you exercise within 6 months of the date you ceased for one of the following reasons

  * injury or disability

  * redundancy

  * retirement

• where the plan rules allow, you exercise your option within 3 years of the date of grant and within 6 months of the ‘event’ because

  * your employment is transferred under the TUPE regulations

  * your employer has been sold or transferred out of the group

  * you wish to accept a cash takeover offer for the shares, subject to certain conditions (the scheme organiser will advise you if this applies)

• where the plan rules allow your executors to exercise your options within 12 months of the date of your death

The exercise of an option in all other circumstances will be chargeable to Income Tax (use working sheet 2).

If you’ve not exercised your option but have received something for giving it up or not exercising it, complete working sheet 6.

Tax advantaged Savings Related Share Schemes (SRS) or Schedule 3 Save As You Earn (SAYE) scheme

You will not be taxable on the grant of an option.

You will not be chargeable to Income Tax if you exercise your options at a time when the scheme remains tax-advantaged (‘a Schedule 3 SAYE Scheme’) and:

• the exercise occurs within 6 months of completing your 3, 5 or 7 years savings contract — 7 year savings feature was abolished with effect from 23 July 2013 (the revised Prospectus date) so this applies to existing 7 year savings contracts

• you cease employment within 3 years of the date of the grant and you exercise within 6 months of the date you ceased for one of the following reasons

  * injury or disability

  * redundancy

  * retirement

• you exercise your option within 3 years of the date of the grant and within 6 months of the ‘event’ because

  * your employment is transferred under the TUPE regulations

  * your employer has been sold or transferred out of the share group

  * you wish to accept a cash takeover offer for the shares, subject to certain conditions (the scheme organiser will advise you if this applies)

• your executors exercise your options within 12 months of the date of your death

The exercise of an option in all other circumstances will be chargeable to Income Tax (use working sheet 3).

Any interest or bonus you receive under the savings contract is not taxable.

If you’ve not exercised your option but have received something for giving it up or not exercising it, complete working sheet 6.

Enterprise Management Incentives (EMI)

If you’ve exercised an EMI option which was granted at a discount, complete working sheet 4 to work out the taxable amount.

If the market value of the shares at the date of exercise was less than the market value at the date of the grant, the taxable amount is restricted to the difference between the market value at the date of exercise and the amount paid for the shares, minus any employer’s NICs you paid.

If you’ve exercised an EMI option more than 90 days (40 days prior to 17 July 2013) after a disqualifying event, and the shares have risen in value since the disqualifying event, complete working sheet 5 to work out the taxable amount. If the entry at item 8 on working sheet 5 is ‘0’ don’t complete the rest of the working sheet, there’s no tax to pay on the exercise.

If you’ve exercised a discounted EMI option more than 90 days (40 days prior to 17 July 2013) after a disqualifying event, complete working sheets 4 and 5 then add together the amount in box 15 on working sheet 4 and the amount in box 12 on working sheet 5 to calculate the taxable amount to be entered in box 1 on page Ai 2.

If you’ve not exercised your EMI option but have received something for giving it up or not exercising it, complete working sheet 6.

All securities options (including tax advantaged schemes)

Assignment or release of an option

If you receive something in return for assigning, releasing or not exercising your option, or for any other reason, you will have to pay Income Tax on the cash or value you receive, unless you release your option in exchange for another option. Complete working sheet 6.

Non tax advantaged securities options (including share options)

If the option was not granted under a tax advantaged scheme, and it was not a qualifying EMI option you may be taxable on the exercise of the option.

Exercise of a securities option

You will be taxed on the difference between the market value of the securities at the time you exercised the option and the amount you paid for the securities (including the cost, if any, of the option). Complete working sheet 7. If you do not have to exercise the option to acquire the securities (because exercise occurs automatically either due to the passage of time or some other condition is met) you still have to fill in working sheet 7 as if you had exercised the option.

Acquisition of securities as benefits

You may be taxed on the benefit arising if:

• you acquire employment-related securities or an interest in securities (this may include securities acquired by the exercise of an option granted in a year in which you were not resident in the UK)

• the market value of the securities (if they were not fully paid up, determined as if they were) was more than the amount you paid for them (disregarding any amounts to be paid after the time they were acquired)

• the benefit is not otherwise taxable

The taxable benefit is worked out by treating the difference between the fully paid-up value of the securities and what you paid for them as if it were an interest-free loan from your employer.

Your employer should have worked out the taxable benefit and included details on form P11D as ‘interest-free and low interest loans’. In that case the taxable amount will be included in the amount that you’ve returned in the Employment pages.

Where your employer has not worked out your taxable benefit you can use working sheet 8 to calculate the taxable amount. If the amount at box 5 on this working sheet, together with all other loans (notional or actual) that you received by reason of your employment, does not exceed £10,000 at any time in the tax year, no benefit will arise. In this case you do not need to continue completing working sheet 9.

There are provisions for interest relief on certain loans to acquire shares in companies. For more information see helpsheet 340 on interest and alternative finance payments eligible for relief on qualifying loans and alternative finance arrangements.

Securities sold or transferred

If you’re treated as receiving an interest-free loan from your employer and are being taxed on the benefit of that loan, as set out above, you may incur additional tax charges if:

• you sell or transfer your securities and the total amount you’ve paid for those securities is less than they were worth when you acquired them

• the amount outstanding on partly paid securities is released or written off

Your employer should tell you the taxable amount but if not, or if you have more tax to pay, complete working sheet 9 to calculate the taxable amount.

Securities acquired from your employment

You will be taxed on securities (or an interest in securities) that you get free or cheaply by reason of your employment.

Free or cheap securities

If you acquire securities from your employment and the price you paid for them was less than they were worth at that time, you will be taxed on the difference between the two amounts. Your employer should tell you the taxable amount but if not, or if you have more tax to pay, complete working sheet 10 to calculate the taxable amount.

Share/securities incentive scheme

Under these schemes you may be promised or allocated a number of securities but you will not acquire the securities until certain conditions are met. In these cases you will be taxed when you acquire the securities. Your employer should tell you the taxable amount but if not, or if you have more tax to pay, complete working sheet 10 to calculate the taxable amount.

Restricted securities

Where the securities acquired are restricted in some way, the market value of those securities may be less than the value of similar, unrestricted securities. If on acquiring the securities you and your employer have together elected to ignore some or all of those restrictions, show the unrestricted market value in box 1 of working sheet 10 (to the extent that you’ve elected to ignore those restrictions).

Convertible securities

These are securities that can be converted into securities of a different description. Where convertible securities are acquired, the market value for box 1 of working sheet 10 should show the market value of those securities as if they were not capable of being converted.

Securities with artificially depressed market value

Income Tax may arise on the acquisition of employment-related securities where the market value has been reduced by at least 10% at the time of acquisition by non-commercial actions (something done other than for a genuine commercial reason). The additional tax will not apply where the shares acquired are subject to a risk of forfeiture lasting 5 years or less and you’ve not elected with your employer to pay tax at the time of acquisition. Your employer should tell you the taxable amount but if not, or if you have more tax to pay, complete working sheet 11 to calculate the taxable amount.

Securities acquired: post acquisition changes

If you’ve acquired employment-related securities which were either restricted or convertible you may be taxed on:

• a proportion of the value of the securities after you acquire them

• a consideration received in connection with the securities

• any special benefits you receive by virtue of your ownership of the securities

• gains arising in connection with convertible securities

This is in addition to the Income Tax due when they were first acquired.

Restricted securities acquired on or after 16 April 2003

Where restricted securities have been acquired on or after 16 April 2003, Income Tax will be due each time there is a chargeable event in relation to those securities. Your employer should be able to tell you whether there’s been a chargeable event or if the securities qualify for exemption. If, when you acquired the securities, you elected with your employer to pay Income Tax at that time as if the securities were unrestricted, you will not have any more Income Tax to pay.

How to calculate the Income Tax

You can calculate the taxable amount by using the formula:

Taxable amount = UMV x (IUP minus PCP minus OP) minus CE

• UMV = unrestricted market value

• IUP = initial uncharged proportion

• PCP = previously charged proportion

• OP = outstanding proportion

• CE = consideration given and expenses incurred

Use working sheets 12 and 13 to help you to calculate the taxable amount. Use working sheet 12 where there’s only one chargeable event arising after acquisition. Use working sheet 13 in all other cases.

If you would like a spreadsheet calculator to work out the taxable amount, or if you acquired restricted shares before 16 April 2003 and need guidance to calculate the taxable amount, email the Share Schemes team at shareschemes@hmrc.gsi.gov.uk.

Convertible securities

If you acquired employment-related securities that carry an immediate or potential right to be converted into securities of a different description, Income Tax will be due each time a chargeable event arises for these securities.

Your employer should tell you if there has been a chargeable event or if the securities qualify for exemption.

Use working sheet 14, 15 or 16 to work out the taxable amount.

Securities with an artificially enhanced market value

Income Tax may arise where the market value of your employment-related securities is increased by more than 10% at the relevant date by non-commercial actions (something done other than for a genuine commercial reason). The relevant date will be either:

• 5 April 2024

• the date you disposed of the securities, if earlier

Use working sheet 17 to work out the taxable amount.

Securities with an artificially reduced market value

After you’ve acquired your securities, more Income Tax may be due where the market value of your securities has been reduced by more than 10% by non-commercial actions (something done other than for a genuine commercial reason).

Restricted securities

Where restricted securities are acquired on or after 16 April 2003, Income Tax may be due if the market value of your securities has been artificially reduced within the period of 7 years ending on the relevant date.

The relevant date will be either:

• 5 April 2024

• the date of the chargeable event, if earlier

Complete working sheet 12 or 13, entering in box 1 the unrestricted market value of the securities on the relevant date, ignoring the effect of the artificial reduction to calculate the taxable amount.

Securities carrying a risk of forfeiture

Securities that are acquired on or after 16 April 2003 and carry a risk of forfeiture should be treated in the same way as restricted securities (see above) where there has been an artificial reduction in the 7 year period ending on the date the securities were acquired.

Convertible securities

Additional Income Tax may be due if the market value of your securities has been artificially reduced by more than 10% within the period of 7 years ending on the date of the chargeable event.

Complete working sheet 14, entering in box 1 the market value of the securities on the date of the chargeable event, ignoring the artificial reduction in value. Where you’ve given consideration for the right to convert the securities, the allowable deduction in box 6 is the excess of the consideration given and the non-convertible market value of the securities when they were acquired, ignoring the artificial reduction in market value.

Consideration or benefits received

Where any consideration or benefits received have been artificially reduced within the period of 7 years ending on receipt of the consideration or benefits, complete the working sheets as described below. In the boxes indicated enter the consideration or benefits received, ignoring the artificial reduction. Complete the:

• disposal of restricted securities — box 1, working sheet 12 or 13

• disposal of convertible securities — box 1, working sheet 15

• release or otherwise in connection with the conversion rights — box 1, working sheet 16

• disposal of securities for more than market value — box 1, working sheet 18

• special benefits — box 1, working sheet 19

Securities disposed of for more than their market value

Income Tax is due where you or a person connected with you dispose of your securities so that neither of you has any further entitlement to them and the consideration received is more than the market value at the time of disposal. Complete working sheet 18 to work out the taxable amount.

Benefits accruing to holders of securities

Income Tax is due on the value of any benefits received by you or a person connected with you because of your ownership of employment-related securities at the time you received them. If the benefits are charged to tax elsewhere you’ll not have to pay tax again.

Complete working sheet 19 to work out the taxable amount.

Taxable specific income from employment-related securities: changes for internationally mobile employees (IMEs) from 6 April 2015

New rules for ‘internationally mobile employees’ apply to employment-related securities and securities options from 6 April 2015. This note provides a brief summary of the way in which employment-related securities acquired from this date are taxed.

The rules are complex. For more guidance see the residence, remittance basis etc notes, and the ‘International’ section of the Employment Related Securities Manual.

IMEs

Where a taxable amount arises in the circumstances covered in this helpsheet and you’re an IME part of the amount may be ‘foreign securities income’, which may be partly or all ‘chargeable foreign securities income’, subject to the remittance basis, or partly or all ‘unchargeable foreign securities income’. You should not include chargeable foreign securities income as part of the taxable amount in the working sheets shown in these notes unless it has been remitted to the UK in the year and unchargeable foreign securities income should not be included at all. You can find guidance on the circumstances in which chargeable foreign securities income is treated as remitted to the UK in the ‘International’ section of the Employment Related Securities Manual. The calculation of what is chargeable and unchargeable foreign securities income is also explained here.

If your employer had enough information to calculate any chargeable or unchargeable foreign securities income, they may have deducted this from the amount to be taxed under PAYE and included it as a taxable amount on your P60. If this has been done correctly then you will only need to complete the Additional information pages box 1 (page Ai 2) to include any amount of chargeable foreign securities income that has been remitted to the UK in the year.

Employee shareholder shares

Employee shareholder is an employment status, available from 1 September 2013. Income tax reliefs and the capital gains tax exemption relating to shares received as consideration for entering into an Employee Shareholder agreement on or after 1 December 2016 have been removed, although there are transitional rules for some employees who have received the mandatory independent advice on their proposed Employee Shareholder agreement on 23 November 2016.

Employee shareholders have different employment rights to employees. They must be awarded at least £2,000 worth of shares by their employer or a parent company in consideration of their agreement to be an employee shareholder.

When employee shareholder shares are acquired, an amount equal to the market value of the shares, minus any payment that the employee is treated as making for the shares, is treated as earnings from the employment for the year in which they are acquired. Individuals who are eligible to be employee shareholders are deemed to have made a payment of £2,000 for the shares.

Employee shareholder shares are employment-related securities and will be subject to the rules of Part 7 of the Income Tax (Earnings and Pensions) Act. For example, if the shares are restricted securities, they will be subject to Chapter 2 of Part 7 and the possibility of charges arising on ‘chargeable events’ which might occur at some time after they’ve been acquired. (In working sheet 12, at step 2, the deemed payment for employee shareholder shares would count as the amount of the consideration given to acquire the securities.)

Similarly, if employee shares are convertible, then they will be subject to Chapter 3 of Part 7. (In working sheet 4, the deemed payment will be treated as the amount paid for the securities. Where the market value of the securities, determined as if they were not convertible, is less than £2,000, the excess of the amount treated as paid will be regarded as consideration given for the right to convert the securities. That would go in box 6 of working sheet 14

The ‘deemed payment’ only applies on the first occasion on which an individual acquires ‘qualifying shares’ under an employee shareholder agreement with their employer, and is subject to the employee shareholder not having a ‘material interest’ in the company.

For detailed guidance, see Guidance on the Income Tax treatment of Employee Shareholder shares.

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