Section 431 Elections

Section 431 elections

Where individuals acquire shares in connection with a current, future or past employment or directorship, these are deemed to be “employment related” shares. Where employment related shares are acquired at less than market value, an income tax charge will arise for the individual on acquisition of the shares. In an early stage single private company, the income tax charge is usually payable by the employee / director via self assessment.

Employment related shares which are subject to restrictions may also be subject to a future income tax charge on the subsequent sale of the shares with the result that income tax, national insurance charges and PAYE withholding obligations may arise on a percentage of the sale proceeds. This is generally very undesirable.

However, the legislation will not apply to impose such future tax charges where either (1) full unrestricted market value was paid for the shares by the employee / director; or (2) a valid section 431 election was made to be taxed on the full unrestricted market value of the shares.

It is therefore usually advisable to make a section 431 election to be taxed on the full unrestricted market value whenever employment related shares are acquired. A section 431 election can be entered into before the shares are acquired but must be made within 14 days of the acquisition of the shares, otherwise it will not be valid and an election cannot be signed at a later date.

Section 431 election (one part...

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