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With effect from 17 July 2014, restricted securities may be exchanged for new restricted securities, for example on a takeover, without giving rise to an income tax charge under Chapter 2 of Part 7, as long as the transaction is within the terms of new ITEPA03/S430A.

Principles of the new rules

»Ê¹ÚÌåÓýapp intention of the provisions in ITEPA03/S430A is that, broadly, where restricted securities are exchanged for other restricted securities, then Chapter 2 will not give rise to a charge where additional value is not being received.

So, in a simple example, where:

• employees were awarded shares 2 years ago in their employer which were exempt from income tax because they were forfeitable for 4 years; and
• when the forfeiture restriction on their shares still has 2 years to run;
• on a takeover the employees exchange their shares for shares of equal value in the acquiring company, where the replacement shares are also forfeitable for 2 years;

there will be no Chapter 2 charge at the time of the exchange of the shares. Instead there will be a Chapter 2 charge on the full value of the new shares when the forfeiture restriction lifts.

While the concept outlined above is fairly straightforward, the provisions must deal with a wide variety of scenarios, including:

• restricted securities that are within the exemption of ITEPA03/S425 (ie forfeitable securities) being exchanged for restricted securities that do not qualify for the exemption because they are not within ITEPA03/S423(2) (ie other restricted securities);
• securities with more than one restriction being exchanged for other restricted securities after one of the restrictions has lifted;
• successive exchanges of restricted securities; and
• various combinations of the above.

As a result, the provisions required to achieve the intended outcome are somewhat lengthy and complex. »Ê¹ÚÌåÓýapp following guidance explains how the provisions work at ERSM30506 and ERSM30507. »Ê¹ÚÌåÓýappre are several examples at ERSM30508, which are intended to illustrate how the rules work.