s431 election on Employee Shares

KellyAnne Murtagh

QUESTION: My employer has gifted me shares in the company and has asked me to complete a section 431 election for them. What is a Section 431 election and why do I need to make one?

ANSWER: There are special tax rules, employment-related securities, that apply to employees and directors who acquire shares in their employing company or a company within the same group. The rules apply to all employees, they can also apply to former or prospective employees.

Without these special rules employers could remunerate their employees in the form of shares or securities, avoiding income tax and NIC charge under PAYE. The employee could then sell their shares in the company and attract lower capital gains tax rates.

Broadly, the difference between the value of the shares and the price paid is charged to income tax. However, what value is placed on the shares? Previously, it was possible to give employees restricted shares whose market value, at the time they were issued, was significantly reduced due to the restrictions on them.

When the restrictions lapsed, the employee would be left with a much more valuable asset. Employment-related securities rules have blocked this advantage by imposing further income tax charges when the restrictions are lifted and having two values when looking at the tax charge.

• Actual market value (AMV) is the amount the shares are worth when acquired with any restrictions attached to them, such as preventing them being sold to third parties, etc.

• Unrestricted market value (UMV) is the amount the shares would be worth without any restrictions attached to them and assuming they can be sold at will.

In very broad terms, unless the 'employee' pays the full UMV for the shares as at the time of their acquisition (or elects, for tax purposes, to be treated as having acquired the shares at their UMV), part of the future growth in value of the shares may fall to be taxed as income rather than capital.

For example purposes should the AMV be 1/10 lower than the value of the shares ignoring the restrictions (the UMV), 1/10 of any future gain on disposal of the shares would be subject to income tax rates (currently 20 per cent, 40 per cent, 45 per cent) [and national insurance rates (12 per cent, 2 per cent, 13.8 per cent) if readily convertible assets] as opposed to capital gains tax rates (10 per cent, 20 per cent).

It is therefore common in corporate transactions, where shares are being transferred or issued to employees, for the individuals concerned to be asked to consider completing a section 431 election. This joint election with the employing company, means that any discount between UMV and AMV is taxed at the point of acquiring the shares. This ensures that any subsequent growth in the shares' value would not be subject to the higher income tax rates. The purpose of the election is to ensure that a smaller amount of income tax is paid now, rather than a larger amount in future.

The election must be made within 14 days of the share issue and so the deadline is very tight. How the tax due following the s.431 election depends on what type of shares are being transferred. Shares that are “readily convertible assets” as defined by tax legislation, PAYE will be operated by the employer and will be subject to income tax and NICs. If they are not readily convertible assets, then income tax will be paid via the individual's personal tax return but NICs will not be payable.

If you have any reservations or you are not sure whether the shares you received are “readily convertible assets”, you should be discuss further with your employer.

:: KellyAnne Murtagh ( is senior manager at PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.

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