Restricted Shares & S431 Elections

This guide explains what restricted securities are, when income tax charges can arise after shares are acquired, and how a section 431 election can help prevent unexpected tax charges later on.

Summary

When shares are acquired with restrictions (for example forfeiture on leaving, transfer limits, or growth hurdles), HMRC may treat later changes to those restrictions as a new taxable event.

This can result in:

income tax when the shares are acquired, and
further income tax later when restrictions lift ⚠️

A section 431 election is commonly used to avoid this by treating the shares as unrestricted for tax purposes from the start, so future growth is usually taxed under capital gains tax (CGT) instead.

For qualifying EMI options exercised at market value, the legislation generally produces a deemed s.431 outcome, meaning no separate election is needed.

What are “restricted securities”?

Restricted securities are employment-related shares whose value is reduced because of conditions attached to them.

Common restrictions include:

forfeiture or compulsory transfer if employment ends (for example reverse vesting),
limits on selling or transferring shares,
growth shares that only participate above a value hurdle,
restricted dividend or voting rights.

💡 These restrictions usually reduce the actual market value (AMV) of the shares compared with their unrestricted market value (UMV).

Why restricted securities can cause tax issues 🔍

If no election is made, the restricted securities rules can create two stages of income tax:

On acquisition or exercise

Tax may arise on the discount between what the individual paid and the restricted value (AMV).
Later, when restrictions change

If restrictions lift, reduce, or are varied, HMRC can treat this as a chargeable event, triggering further income tax on part of the increase in value ⚠️

This often surprises people, because the tax arises without any sale or cash receipt.

What a section 431 election does

A section 431 election is a joint election by the company and the individual to ignore restrictions for tax purposes.

In practice, this usually means:

more income tax upfront, because restrictions are ignored, but
no further income tax when restrictions lift later, and
future growth is taxed under CGT, not employment income.

💡 The election doesn’t change the legal rights attached to the shares, it only affects how HMRC taxes them.

EMI schemes: when is a section 431 election needed?

EMI exercised at or above market value

Where EMI options are:

properly qualifying, and
exercised at AMV or above,

no income tax arises on exercise, and the legislation effectively applies a deemed s.431 election.

👍 In these cases, restricted securities charges should not arise later just because restrictions lift.

EMI exercised below market value

If EMI options are exercised below AMV, an income tax charge arises on exercise.

In this situation:

the deemed treatment does not fully protect against later restricted-securities charges, and
a signed section 431 election is commonly used to prevent part of the future gain being taxed as income.

EMI options that become non-qualifying

If an EMI option:

ceases to qualify (for example after a disqualifying event), and
is exercised later,

the option is effectively treated as unapproved.

⚠️ In these cases, restrictions on the shares can bring the restricted securities rules into play, and a section 431 election often becomes relevant.

Other common situations where section 431 is useful

Reverse vesting shares

Shares that can be forfeited or transferred back if someone leaves are usually restricted securities.

Without a s.431 election:

a later end to the forfeiture risk can trigger income tax.

With a s.431 election:

that later charge is normally avoided, and
growth is more likely to fall into CGT.

Growth shares and hurdle shares

Growth shares are almost always restricted because they:

only have value above a hurdle, and
often include leaver and transfer restrictions.

💡 A section 431 election is often critical to ensure that increases in value above the hurdle are not partly taxed as employment income.

Shares acquired by directors or founders

Directors often acquire shares:

at incorporation, or
as part of an investment or restructuring,

and these shares are frequently subject to leaver and transfer restrictions.

Even where someone is a founder, HMRC can still treat the shares as employment-related securities, making a s.431 election an important planning step.

Where shares are acquired through:

unapproved options, or
direct share issues to employees or directors,

any restrictions can trigger the restricted securities regime.

⚠️ Without a s.431 election, part of the eventual gain may be taxed as income instead of CGT.

When and how section 431 elections are made

Elections must normally be made within 14 days of the shares being acquired.
They are joint elections (company and individual).
They do not need to be submitted to HMRC, but must be retained in case of enquiry.
HMRC provides standard template wording.

👍 In practice, elections are often signed at the same time as the option or share documents.

Troubleshooting

We didn’t make a section 431 election, is that a problem?

Possibly. If the shares are restricted, you may face income tax later when restrictions lift. It’s worth reviewing the documents and values early.

Does a section 431 election always save tax?

Not always. It often increases upfront tax, but can significantly reduce overall tax if the shares grow in value.

What about National Insurance?

This guide assumes the shares are not Readily Convertible Assets (RCAs). If they are RCAs, employer and employee NIC may also apply ⚠️