In answering this question, we must understand what the purpose of a 431 election is. A 431 election under section 431 ITEPA 2003 is an agreement between an employee and employer to treat a restricted share option as unrestricted to mitigate any further charge to income tax under section 428 ITEPA 2003. The election must be made within 14 days of the acquisition and is irrevocable. The employer must keep a record should HMRC require evidence of the election having been made.
Essentially, a 431 election allows an employee to purchase a restricted share option at market value at the time of acquisition ignoring any restricted share price. This removes any future charge to income tax which would normally occur on securities that have been purchased at a restricted price. Without a 431 election, a charge to tax on the proportion of the market value not paid will arise when the restriction is lifted, see ERSM30400 for the calculation of the charge.
A deemed election is treated as having been made automatically under section 431A ITEPA 2003 where section 431A (2) applies. This would apply in the following circumstances and most commonly with an EMI scheme.
- Schedule 2 ITEPA 2003 – Share Incentive Plan (SIP) ETASSUM20000 – in accordance with section 490 ITEPA 2003
- Schedule 3 ITEPA 2003 – Save as you Earn (SAYE) ETASSUM30000 – in accordance with section 519 ITEPA 2003
- Schedule 4 ITEPA 2003 – Company Share Option Plan (CSOP) ETASSUM40000 – in accordance with section 524 ITEPA 2003
- Schedule 5 ITEPA 2003 – Enterprise Management Incentives (EMI) ETASSUM50000 – in accordance with section 530 ITEPA 2003
Where securities are awarded under a qualifying EMI scheme in accordance with section 530 ITEPA 2003 (the option to acquire the shares is at not less than the market value), an election under 431A automatically takes effect and no formal election under section 431 is required. This is what is meant by the ‘deemed’ election.
However, if the shares have been awarded at less than market value (at a discounted price), relief by virtue of section 531 ITEPA 2003 will take effect and here there can be no ‘deemed’ election the employee and employer would again have to decide whether they want to make a joint s431 election instead. This is an issue that can often be overlooked where EMI options are awarded at a discounted price as an incentive to employees. See ERSM110560 for calculation of the potential tax charge on a discounted EMI.
Please share this article with your clients
Our team of expert consultants have a wealth of experience and can also provide a written consultancy service to support your practice, like having your very own tax and VAT department.
Why not see what My VIP Tax Team can do for your practice, call 0800 231 5199 or vip@cronertaxwise.com to find out more.
