ERSM30430 - Restricted securities: calculation of charge: complex example

Where there is more than one restriction the same principles apply (see ERSM30400), but it may become more difficult to arrive at the right answer without using the formula.

Example - two restrictions

Joanne Halford is given a share with two restrictions. There is a risk of forfeiture, lasting 3 years, and a restriction on sale for 5 years.

• On acquisition the Unrestricted MV is £100
• The forfeiture restriction reduces the value by £20
• The sale restriction reduces the value by a further £25
• The restricted MV on acquisition is therefore £55
• The UMV at 3 years is £200, but because the shares still cannot be sold for 2 years the AMV is only £180.
• The UMV at 5 years is £360.

 

Applying the formula

UMV x (IUP - PCP - OP) - CE

• There is no initial charge, as it is exempted by S425 = £0
• At the 3-year point the charge is £200 x (1.0 - 0 - 0.1) - 0 = £180
• At the 5-year point the charge is £360 x (1.0 - 0.9 - 0) - 0 = £36

It will be seen that the IUP (initial uncharged proportion) is fixed at 1.0. This does not change, and reflects the fact that none of the value was charged on acquisition.

At the first chargeable occasion there is no previously charged proportion, but there is an outstanding proportion of 10% - reflecting the restriction that continues at that point.

At the second chargeable occasion there is a previously charged proportion of 0.9, reflecting the charge at the three-year point. But there is now no outstanding proportion, as all the restrictions have now been lifted.

It is possible for a charge to arise on the lifting of a restriction, even if the share price has fallen - perhaps to an amount that is lower than the actual market value on acquisition.