International
Asia Pacific
EMEA
North America
Latin America
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.
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:
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
Copyright © 2024 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.
Are you sure want to delete comment ?
Scan this QR Code to share this content
