What the election actually does
Most shares given to employees in a private company are restricted securities. They carry conditions - you must offer them back if you leave, you cannot sell them freely, they may be forfeited. Those restrictions depress what the shares are worth, which is helpful when you acquire them and unhelpful later.
Unhelpful later, because tax law does not simply forget about the discount you enjoyed. When the restrictions eventually lift or the shares are sold, a proportion of the value which had been suppressed comes back into charge as employment income, taxed at your marginal rate with National Insurance on top, rather than as a capital gain.
A section 431 election closes that door. Employer and employee jointly elect to be taxed at acquisition as though the shares had no restrictions at all. You pay income tax up front on the full unrestricted value, and everything after that is a capital gain. It is a deliberate trade - a smaller charge now, on a smaller number, against a larger one later on a bigger number.
The election is not sent to HMRC. Employer and employee each keep a signed copy, and the company reports on its annual return whether one was made.
The part almost nobody leads with
Search for section 431 and you will find a great deal of advice telling you to sign one. Much of it is aimed at people who do not need to.
Where restricted shares are acquired through a tax-advantaged scheme - a SIP, SAYE, a CSOP or EMI - an election under section 431(1) is deemed to have been made. The mechanism sits in section 431A, it is automatic, and it applies whether or not anybody in the room has heard of it. Nothing needs signing and no deadline needs watching.
So the employee exercising EMI options granted at market value, who has been told sternly to complete a section 431 election within 14 days, is being given advice which is not wrong exactly, but describes work already done for them by statute.
Where it stops being automatic
The deemed election has a boundary, and it is precisely where people stop paying attention.
It applies to EMI shares only where the relief comes under section 530 - the ordinary case, options granted with an exercise price at or above actual market value. Where EMI options are granted at a discount, relief comes under section 531 instead, which carries its own potential income tax charge on exercise. In that situation there is no deemed election, and employer and employee must decide whether to make a real one within 14 days of the shares being acquired.
Discounted EMI options are not exotic. They are granted deliberately, to make the options meaningful for people who cannot fund an exercise at full value. The scheme still works and the tax treatment is still good. It simply stops being automatic, and the fourteen days start running from acquisition whether anyone is counting or not.
Where it genuinely matters
Outside the tax-advantaged schemes there is nothing deeming anything, and the election does real work.
- Growth shares. Issued at a low value because of the hurdle and heavily restricted, so the gap between restricted and unrestricted value is exactly where a later charge would land. An election is close to standard.
- Unapproved options. Shares acquired on exercise are restricted securities like any others, with no scheme relief behind them.
- Founders and employees simply buying shares. Any acquisition of restricted shares by reason of employment is in scope, including the quiet ones nobody thinks of as a share scheme.
The judgement is genuinely a judgement. Electing means paying income tax now on value the employee cannot yet realise, which is uncomfortable when the shares might come to nothing. Not electing means accepting a potentially much larger charge on a much larger number, at the moment the shares finally pay. Where the company is expected to grow substantially, electing is usually right. Where it might not, the calculation is closer than the standard advice suggests.
Frequently asked questions
What is a section 431 election?
A joint election by an employer and an employee under section 431 of the Income Tax (Earnings and Pensions) Act 2003, treating restricted shares as though the restrictions did not exist. Income tax is paid up front on the full unrestricted market value, and all subsequent growth is taxed as a capital gain rather than as employment income.
How long do you have to make a section 431 election?
Fourteen days from the date the shares are acquired. It is a hard deadline - there is no extension mechanism, no reasonable excuse provision and no way to make one afterwards. For options, acquisition means exercise, not grant.
Do you need a section 431 election for EMI options?
Usually not. Where shares are acquired through EMI, CSOP, SAYE or a SIP and relief arises under section 530, an election is deemed to have been made automatically under section 431A. The exception is EMI options granted at a discount, where relief comes under section 531, no election is deemed, and a real one must be made within 14 days.
Do you send a section 431 election to HMRC?
No. The employer and the employee each keep a signed copy, and the employer reports on its annual employment related securities return whether an election was made. HMRC does not approve it, but it must exist and be capable of being produced.
Get the election done at the right moment
The fourteen days run from acquisition, and by the time anyone notices they have passed there is nothing to be done. Silva sets up share schemes and handles the elections as part of the pack, so the deadline is somebody’s job rather than nobody’s.