United Kingdom: HMRC has published helpful guidance on section 431 elections, simplifying the process of entering into the election for both companies and employees

10 Aug 2022    1 minute read
Section 431 HMRC Guidance Workforce Redesign

In brief

By way of background, a section 431 election is a joint election made by an employee/director and their employing company to crystallise the income tax charge upon acquisition in relation to shares that are restricted.

Section 431 elections are typically entered into where shares are subject to forfeiture provisions or transfer restrictions (such as a holding period); however, there is a growing trend amongst companies to enter into section 431 elections for shares subject to clawback restrictions. By entering into a section 431 election, the employee is electing to pay tax on the unrestricted market value of the shares (i.e., the value of the shares if they weren't subject to restrictions) upfront, rather than paying additional tax when the restrictions fall away (or when the restricted shares are sold).

HMRC has published some helpful guidance on section 431 elections.

Contents

Comments

For shares in a private company, section 431 elections can be very valuable if the value of the shares later goes up. For shares in a public company that are subject to restrictions (such as a holding conditions), it is advisable to enter into a section 431 election from an administrative perspective in order to avoid paying income tax and NICs (and operating PAYE withholding) when the restrictions fall away.

A section 431 election may be entered into before acquisition, but must be entered into within 14 days of acquisition. As such, many companies ask employees to enter into a section 431 election as part of the grant process.

The updates from HMRC contain some useful practical points, including confirmation that the election may:

  • Cover securities in several companies, provided that they are all in the same group.
  • Cover more than one type of security.
  • Be in a form other than one published by HMRC, including an email or part of an award agreement (provided that the other form has no less detail that the agreed form supplied by HMRC).
  • Be signed on behalf of an employee under a power of attorney - this will be particularly relevant for employee share arrangements involving a high number of participants.
  • Be signed electronically, including using tick boxes and voting button. However, the company must store the acceptances and data in a form that can be verified.

For more information about section 431 elections, please reach out to a member of the Employee Benefits team.

Please see useful links below:

ERSM30450 - Restricted securities: elections to exclude outstanding restrictions - HMRC internal manual

ERSM30460 - Restricted securities: elections to exclude outstanding restrictions: further issues - HMRC internal manual

Contact Information
Jeremy Edwards
Partner
London
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jeremy.edwards@bakermckenzie.com
Amy Thompson
Junior Associate at BakerMcKenzie
London
amy.thompson@bakermckenzie.com

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