CG56344 | Shares and securities: employee share schemes: employment-related securities: clogging

The employer may offer shares or other employment-related securities to the employee on terms which restrict the employee's ability to dispose of them. For instance the employee may be required to sell back the shares or securities at par, if he or she does not remain in employment with the employer for a specified length of time. These restrictions are sometimes referred to as a ‘clog’. As long as the restriction remains in force

• the employer holds retained rights over the shares or securities and

• the employee holds restricted shares or securities which are treated separately from any other shares of the same class not acquired as an employee or not subject to restrictions, or the same restrictions, on disposal by virtue of section 104(4) of the Taxation of Chargeable Gains Act (TCGA) 1992 (see CG51580).

See the example at CG56348.

Where the employing company issues its own new shares, there will be no capital gains consequences for the employer as an issue of shares by a company is not a disposal of those shares. However, there will be a disposal by the employer where shares or securities in another company are transferred by it to the employee.

Where there is a disposal by the employer and rights are retained over the shares or other securities, the disposal is a part disposal. The ordinary rules for part disposals will apply, see CG12730P. The value of the retained rights should be taken as the full market value of the unrestricted asset less the value attributed to the interest disposed of. Section 149B TCGA 1992 and section 149AA TCGA 1992 do not change the tax consequences for the employer.

The company's retained rights are wasting assets, whose predictable life is the period over which the restriction operates, see CG76700. At the end of the period there is a final disposal for no consideration (see CG15740). No allowable loss will arise, as the cost will have wasted in full.

If the restrictions operate and, after a part disposal, the shares or other securities are reacquired by the employer, the new cost of the shares or other securities to the employer will be the residue of the wasted cost, together with anything more the employer paid for the shares on reacquisition.