Section 431 Elections

• Law Firm: Weightmans
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Directors and Officers, Income Tax
• Author: Haydn Rogan
• Published date: 13 January 2023

It is common for individuals to be asked to complete a section 431 election. But what is a section 431 election? Tax expert, Haydn Rogan, explains.

What is a section 431 election and why do I need to make one?

It is common in corporate transactions, where shares are being transferred or issued to employees or directors, for the individuals concerned to be asked (or even required) to complete a section 431 election. But what is a section 431 election and why do you need to make one?

Employees and directors (whether executive or non-executive) who subscribe for or acquire shares in the company or any member of the group for which they work are within the scope of special tax rules applying to employment-related securities.

It should be noted that the rules apply to all officeholders including non-executive directors even though they are not technically employees and cannot be sidestepped by issuing the shares to family members or other connected persons.

The rules apply to UK resident employees and directors who work for and acquire shares in overseas companies but do not generally apply to non-UK resident employees or directors who do not carry out any duties in the UK (and are therefore not subject to UK PAYE and NICs).

The rules can also apply to former or prospective employments so, for example, will apply to investors who are to be appointed directors.

The essence of the rules is to prevent employment income or reward from being passed to employees or directors (or any persons associated with them) by way of capital returns in relation to shares or securities.

One of the ways this was achieved in the past was by giving employees or directors restricted shares whose market value, at the time they were issued, was suppressed by virtue of the restrictions attached to them.

The restrictions would then either fall away or be removed, leaving the employee with a much more valuable asset.

Restricted securities

One of the main potential charges under the employment-related security rules, therefore, relates to restricted securities.

For tax purposes employment-related securities have two values:

1. Actual market value (AMV) i.e. what the shares are actually worth; and
2. Unrestricted market value (UMV) i.e. what the shares would be worth if there were no relevant restrictions attaching to them (for example, on the ability to sell or transfer them) whether those restrictions are set out in the articles, investment agreement, shareholders' agreements or elsewhere.

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