Proposed changes to the taxation of employee shares: ‘marketable securities’

HMRC has issued a consultation document seeking views on proposals made by the Office of Tax Simplification (OTS) for changes to the taxation of unapproved share schemes.

The present position
In very broad terms, when employees are awarded shares but their ability to deal with them is restricted in such a way that the market value of the securities is affected, or the shares are subject to the risk of forfeiture, they are liable to tax on the market value of the shares taking into account the restrictions or forfeiture risk. No income tax charge arises on acquisition if the forfeiture risk lifts within five years. When restrictions or forfeiture conditions are lifted, or the securities are disposed of, income tax charges arise on the resulting increases in market value. The employer and employee may jointly elect for the restrictions to be ignored on acquisition so that a higher tax charge arises on acquisition of the securities, but no further income tax charges arise in the future. Any gain on disposal will then be liable to capital gains tax.

The ‘marketable securities’ approach
The OTS sees these existing rules as complex and confusing. It is particularly critical of the fact that a tax charge can arise where there is no disposal, and where there may thus be no funds available to finance the tax charge. It proposes that employees should be taxable on acquisition only in the case of shares that are ‘marketable securities’ when they are acquired. Broadly, shares would be marketable securities if they could be sold for a cash sum at least substantially equal to their unrestricted value.

For shares that are not marketable securities, employees would be able to choose either to be taxed at the time of acquisition or at the time the shares become marketable securities. In either case the charge would be based on the unrestricted market value or (in the latter case, where relevant) on the actual value of the consideration received on a sale within 14 days after the date on which the charge arose.

Other proposals
There are also recommendations as regards the point at which the shares would become ‘readily convertible assets’. For such shares the income tax charge is payable under PAYE rather than by assessment, and national insurance contributions are also due.

In addition, the OTS proposes that where income tax has not yet been paid on employee shares because they are not yet marketable securities, any income, dividends, gratuities, profits or incidental benefits received from the shares would be treated as employment income.

The full text of the consultation document is here.


Jacquelyn Kimber

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