Share this content

Shares acquired at undervalue

Earnings or notional loan?

If shares are issued by an employer company to an employee for less than market value, then it is pretty clear - in both the legislation and HMRC guidance - that a charge under ITEPA 2003 s.62 arises. However, the position is less clear when the employee acquires shares from another shareholder at less than MV. None of the exceptions (family etc) apply so the shares will be employment-related. However, it seems to me that they have not been acquired "from" the employment, such that s.62 is not in point and the notional loan charge should instead apply (but with no immediate charge since the exclusion for acquisition of shares in a close company). Do others agree, or disagree?


In response to the first comment below, it is not my "rule" but seemingly HMRC's interpretation:

"The acquisition of securities may not be chargeable as ‘earnings’- the charge as earnings is on earnings from the employment. The test for the application of Part 7 is that securities are acquired ‘by reason of employment’. ... In the unusual circumstances where securities do not constitue earnings from the employment but are acquired by reason of employment the charge will be under Chapter 3C."

On the one hand, that would appear to confirm my thinking. On the other, the transfer of shares between shareholders is not particularly unusual, which leaves me wondering if HMRC consider such a transfer to remain subject to s.62. (Then again, it is probably fair to say that a transfer between unconnected individuals at undervalue is relatively unusual.)


Please login or register to join the discussion.

22nd Mar 2019 10:26

Have you made up your own rule? Where does “from” come from?

Thanks (0)
22nd Mar 2019 12:27

I am inclined to agree with your analysis. What may be important, though, is the motive. As you say, why would someone want to transfer shares to an unconnected person at undervalue?

We had a case where no consideration was paid, and the reason for the transfer was to equalise shareholdings, as had always been the intention but someone screwed up when setting up the company. HMRC argued that in that case, since the acquisition of shares by B was effectively a delayed issue of shares then they fell squarely within section 62. We successfully countered that with the argument that it was therefore effectively a delayed issue of subscription shares - and, overall, no-one benefitted. We were a little surprised when HMRC conceded that point without further question - I was not convinced that a Tribunal would have agreed with our analysis.

Thanks (0)
By ms998
22nd Mar 2019 12:53

If the shares weren't acquired by reason of employment, how/why were they acquired? Can i buy some of these undervalued shares too?

Thanks (0)
to ms998
22nd Mar 2019 13:01

There is a difference, for tax purposes at least, between something acquired "by reason of" employment and something acquired "from" employment.

I agree though that, as I said above, motive could be important here.

Thanks (0)
22nd Mar 2019 14:30

OP, respondents and others may be notified of updates by way of new contributions; we’re not notified of updates by way of edit. Be aware, then, that your approach costs you part of your audience. Another part of the audience is known to ignore anonymous threads. As a result, answers you derive may be lose balance and rigour.

The motive/reason point is relevant… which is to say that your analysis could be correct. It would though be somewhat surprising, notwithstanding

Thanks (0)
Share this content