ETASSUM57150 | Enterprise Management Incentives (EMI): Taxation of EMI options: Section 431 election – effect of election for restrictions to be ignored

Section 431 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

If an election is made under section 431 ITEPA before or within 14 days after the options are exercised, the restrictions are ignored at the date of exercise so that tax is payable when the option is exercised as though the shares were not restricted. The election is often beneficial, as the amount of tax payable may be lower at the date of exercise than at the later time when the restrictions are lifted.

In normal circumstances, tax is not payable on the exercise of EMI options over restricted shares, but it may be payable if restricted shares are acquired at a discount or more than 90 days (40 days prior to 17 July 2013) after a disqualifying event. In circumstances when the exercise is tax-relieved, the option holder is deemed to have made a section 431 election (ERSM30450) so that no further tax charge arises when the restrictions are lifted.

Where restricted shares are acquired at a discount, the amount liable to tax is the difference between the “chargeable market value” and the amount paid for the shares. The “chargeable market value” is the lower of the market value at the date of grant and the market value at the date of exercise. Where no section 431 election (ERSM30450) is in place, the market value to be used is the actual market value (AMV), taking into account the restrictions.

Where a section 431 election (ERSM30450) is in place the “chargeable market value” is the lower of the actual market value (AMV) at the date of grant and the unrestricted market value (UMV) at the date of exercise.

Where restricted shares are acquired more than 90 days (40 days prior to 17 July 2013) after a disqualifying event, tax is calculated on the increase in value after the disqualifying event. If no section 431 election (ERSM30450) has been made, the actual market value (AMV) is used in the calculation.

If there has been a section 431 election (ERSM30450), the actual market value (AMV) is used at the date of the disqualifying event, and the unrestricted market value (UMV) at the date of exercise.