Meaning
Joint statutory declaration eliminates future income tax charges on the growth of restricted shares by opting to pay tax up front. Under UK tax law, a section 431 election allows this tax treatment.
Valuation Choice
Without this choice, the employee faces an income tax charge on the value of the shares when the restrictions are lifted or the shares are sold. The taxable amount would be based on the fair market value at that future date. This could result in a much higher tax bill if the company grows.
Tax Obligation
By making the election within fourteen days of acquiring the shares, the employee is taxed on the unrestricted market value at the date of acquisition. The employee pays income tax on the difference between the actual price paid and the unrestricted value, ignoring the depressing effect of the restrictions. Any future growth is then subject to capital gains tax rather than the higher rates of income tax and national insurance.
Share Disposal
This mechanism is particularly popular in startup companies where the unrestricted value is very low at the start. It shifts the tax burden to the beginning of the investment period. The risk is that if the shares become worthless, the taxpayer cannot recover the tax paid at acquisition.
