Who has to sign the Section 431 election?

The election is signed jointly by the employee acquiring the shares and the employer (or the company in which the shares are held, where these differ). It must be made within 14 days of the share acquisition.

Is the election always beneficial?

In most cases yes, particularly where the shares are expected to grow significantly in value. The election crystallises income tax exposure on UMV at acquisition and converts future growth into capital gains. Where the gap between UMV and AMV is large and the shares may not grow, advice from a tax specialist is recommended.

Do EMI option holders need a Section 431 election?

EMI shares acquired on exercise of qualifying EMI options are generally outside the restricted securities rules, so a Section 431 election is not normally required for EMI shares. It is, however, often used for non-EMI sweat equity, growth shares or unapproved options.

How long is the UMV figure valid?

The UMV is determined as at the date of acquisition. The election itself is a one-time event tied to that acquisition and does not 'expire' in the way an EMI valuation does.

Can Optival prepare the election form?

Optival prepares the independent UMV report. The election itself is a tax document - we recommend the company's tax adviser or solicitor draft and execute it, referencing our valuation as evidence of UMV.

Section 431 Elections

Section 431 Election Valuation

Independent unrestricted market value (UMV) reports supporting Section 431 elections within the 14-day window - protecting employees and employers from future income tax exposure on share gains.

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What is a Section 431 election valuation?

When an employee acquires shares that carry restrictions - leaver provisions, transfer restrictions, forfeiture clauses or compulsory transfer triggers - the shares are treated as restricted securities for UK tax purposes under Part 7 of ITEPA 2003.

Without a Section 431 election, future growth in value of those shares can be taxed as employment income (subject to PAYE and NICs) rather than capital gains. A Section 431 election made jointly by the employer and employee within 14 days of acquisition disapplies that treatment by treating the shares as unrestricted from outset.

The election requires the parties to value the shares at their unrestricted market value (UMV) - ignoring the restrictions that depress the actual market value. An independent UMV report supports both the election itself and any subsequent challenge by HMRC.

When is it required?

Sweat equity and founder share grants

Founders or early hires receiving shares subject to vesting, leaver or compulsory transfer provisions.

Acquisition under share schemes outside EMI

Growth share, restricted share or unapproved option schemes where the shares acquired are restricted securities.

Post-acquisition share transfers

Where shares are transferred to employees as part of a corporate transaction or restructuring with restrictions attached.

Protecting against future PAYE / NICs exposure

Where the company expects significant share value growth and wants to crystallise the income tax charge upfront on UMV.

Our methodology

A Section 431 valuation focuses on UMV - the value of the shares assuming none of the restrictive provisions apply. The methodology mirrors UMV work for EMI but is tailored to the specific share class being acquired.

Determining UMV vs AMV

We identify the restrictions in the articles and shareholders' agreement, quantify their impact on AMV, and isolate the UMV by stripping those restrictions out - providing the figure required for the Section 431 election.

Earnings or asset-based anchor

For trading companies we apply earnings multiples calibrated to listed comparables and recent UK transactions; for asset-rich businesses we anchor on adjusted net assets.

Preference and ratchet treatment

Where the cap table includes preference shares, ratchets or convertible instruments, we waterfall the equity value to the specific share class being acquired by the employee.

Documentation for the 14-day window

We deliver a concise UMV report and supporting schedules suitable to be referenced in the joint Section 431 election form, with the methodology explained for any future HMRC enquiry.

Key UK considerations

The Section 431 election must be made in writing, jointly by employer and employee, within 14 days of the acquisition - the deadline is strict.
UMV ignores restrictions; AMV reflects them. Section 431 uses UMV. EMI option exercise prices use AMV. The two figures must not be confused.
If no election is made and the shares are restricted, future growth can be taxed as employment income - generally the worst tax outcome for both employer (NICs) and employee (income tax + NICs).
Where employees pay UMV in cash for the shares, no income tax charge typically arises on acquisition - but the election still protects future growth.
HMRC may challenge UMV after the fact; a contemporaneous independent valuation report is the strongest defence.

Optival provides independent valuation advice. We are not a regulated tax adviser and do not act for clients in dealings with HMRC.

Timeline & deliverables

Section 431 valuations are typically prioritised given the 14-day deadline. We can usually deliver an indicative UMV within 2-3 working days and the final report within 5 working days of receiving complete information.

Independent UMV report with methodology and supporting evidence
AMV cross-check with restriction-by-restriction quantification
Comparables schedule (listed and transaction multiples)
Summary letter referenceable in the joint Section 431 election form

Delivered as part of

EMI Valuations

Section 431 valuations are delivered under our EMI Valuations service - fixed-fee, independent and supported by the same UMV / AMV methodology applied to EMI option grants.

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Section 431 FAQ

Common questions from founders, advisers and finance teams.

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