Income Tax (Earnings and Pensions) Act 2003 section 454

Deemed election for disapplication of Chapter 2

Section 454 deals with how restricted shares acquired in connection with a research institution spin-out are treated for tax purposes, including a deemed election to disapply Chapter 2 restrictions and the option for the employer and employee to opt out of that deemed election.

• Where shares acquired under a spin-out arrangement are restricted securities, the employer and employee are automatically treated as having elected to disapply Chapter 2, so that the unrestricted market value is used at acquisition and no later Chapter 2 charges arise.
• The employer and employee may jointly agree to opt out of this deemed election, meaning only the actual (restricted) market value is taken into account at acquisition, and Chapter 4A relief applies only to that lower amount.
• An opt-out agreement is irrevocable, must be made in an HMRC-approved form, and must be completed within 14 days of the share acquisition.
• If the parties opt out, any later Chapter 2 charge when a restriction lifts must be calculated by ignoring the effect of the intellectual property agreement and any related IP transfer on the initial unrestricted market value.