A section 431 election is one of the most time-critical actions a founder or employee can take when acquiring shares in a startup. The window is 14 days from acquisition. It cannot be extended. Missing it can mean the difference between paying capital gains tax on your exit and paying income tax on the same growth. This guide explains what the election does, why the funded-startup context makes it dangerous to miss, and how the exit numbers play out with and without it.
What a section 431 election is
A section 431 election is a joint election, made by both the company and the individual acquiring shares, to be taxed on the full unrestricted market value (UMV) of the shares at the point of acquisition, rather than on the actual acquisition price alone. By accepting this upfront charge, the individual ensures that all future growth in the value of those shares is treated as a capital gain when the shares are eventually sold, rather than as employment income when any restriction is lifted. The election is named after section 431 of the Income Tax (Earnings and Pensions) Act 2003 and is governed by the HMRC Employment-Related Securities Manual at ERSM30450.
The election is joint: both the employer (or the company whose shares are being acquired) and the acquiring individual must sign it. It is not a unilateral filing by either party alone.
What restricted securities are and why founders hold them
Restricted securities are shares or other securities that carry restrictions which affect their value. Typical restrictions include leaver provisions (good leaver / bad leaver clauses that let the company or other shareholders buy back shares if the holder leaves), vesting schedules (rights that lapse or that require buy-back if the holder leaves before a date), and transfer restrictions (pre-emption rights or drag-along clauses under a shareholders' agreement).
Almost every set of founder shares carries at least one of these features. They are put in place by investors and co-founders for commercially sensible reasons, to ensure founders stay and build the company. But from a tax perspective, shares carrying restrictions are worth less than the same shares without those restrictions, because the holder cannot freely sell them. That gap between the restricted value and the unrestricted market value is exactly what the section 431 election addresses.
Restricted securities are common at two moments in particular: when a startup is first incorporated and founders take their shares, and when new shares are issued at a funding round. At both moments the 14-day clock starts running.
What the election does: the tax mechanics
Where an individual acquires restricted securities without making a section 431 election, the shares fall under the actual market value regime. In that regime, future events, specifically the lifting or relaxation of restrictions, can generate a charge to income tax and National Insurance as employment income at the point those restrictions lift, rather than at exit. The individual is effectively taxed twice on different slices of growth: once when restrictions are lifted, and again (as CGT) on any additional growth to exit.
Where the election is made, the individual agrees to be taxed upfront on the difference between what they paid and the full unrestricted market value of the shares at acquisition. At seed stage, when the company is newly incorporated and shares are issued at a nominal value, this difference is usually very small because the unrestricted market value of a pre-revenue startup is itself low. The upfront charge is therefore typically modest. In return, all future growth, from seed valuation to exit value, is treated as a capital gain and taxed as CGT. Source: gov.uk ERSM30450.
The 14-day deadline: fixed and non-extendable
The joint election must be made within 14 days of the date of acquisition of the restricted securities. This is the statutory window and it cannot be extended by HMRC, the company, or any other party. Source: gov.uk ERSM30450.
| Event | Illustration |
|---|---|
| Share acquisition date | Day 1 |
| Section 431 election deadline | Day 1 + 14 calendar days |
| Election after this date | Not valid; window closed |
The practical consequence is that the election needs to be prepared in advance of, or at the same time as, the share acquisition itself. Waiting until the next board meeting, the next monthly accountancy call, or even the next week is often too late to act safely.
The funded-startup trap
The funded-startup trap works as follows. A founder takes shares at incorporation for a nominal price, say £0.001 per share, on a total of 1,000,000 shares. The company grows over four years, raises a Series A, and eventually exits. The founder's shares are now worth several pounds each. Throughout this time the shares carried leaver provisions under the shareholders' agreement.
Without a section 431 election made at incorporation, the lifting of those leaver provisions (when they fall away at exit, or when they are formally released as part of a deal) can trigger an income tax and NIC charge on the value attributable to that restriction-lifting event, rather than CGT. For a founder in the higher or additional rate band, that charge is materially larger than the CGT alternative. The election, which at Day 1 would have produced a tiny charge (nominal price versus a near-zero seed-stage UMV), was the cheap insurance that was not taken.
This trap is most acute for funded startups because institutional investors typically impose formal leaver provisions from the first institutional round. If shares were originally issued without the election and new restrictions are added at a round, each new share issuance restarts the question. Any time new restricted shares are issued, whether to founders, early employees, or advisers, the 14-day clock runs again on those new shares.
Worked example: before and after the election
The figures below are illustrative only. They show the structural difference between the two paths, not a tax advice calculation. All figures should be modelled against your specific facts.
| Column A: No election made | Column B: Election made at acquisition | |
|---|---|---|
| Acquisition | Founder buys 1,000,000 shares at £0.001 each (total £1,000). Shares carry leaver restrictions. No election made. | Founder buys 1,000,000 shares at £0.001 each (total £1,000). Shares carry leaver restrictions. Election made: UMV at acquisition also assessed at £0.001 per share (illustrative: company is pre-revenue, UMV is nominally small). Upfront charge on difference: near nil. |
| Interim: restrictions lifting | As leaver provisions fall away (at a round or on exit), a portion of the share value attributable to the restriction is assessed as employment income. Rate depends on individual circumstances. NIC may also arise. This charge occurs before exit proceeds are received. | No interim charge. Growth between acquisition and exit accrues as capital, not income. |
| Exit: shares sell for £3 per share (illustrative) | A portion of the £3 exit value per share has already been assessed as employment income on restriction-lifting. The remaining gain (from the restriction-lifting point to exit) is CGT at 18% / 24%. Total effective rate on the full uplift from £0.001 is blended between income tax rates and CGT. | Full gain from £0.001 acquisition price to £3 exit price is CGT. At 18% within basic-rate band / 24% above. If BADR applies: 18% from 6 April 2026 on up to £1m lifetime gains. |
| Net position | Employment income charge on restriction-lifting event, plus CGT on residual gain. Income tax and NIC rates apply to the first tranche. | CGT only on the full uplift. BADR available where conditions met. No NIC. |
Key point on Column A: the income tax rate on the no-election path depends on the individual's facts and the exact nature of the restriction-lifting event, so Column A is deliberately left qualitative. Read those numbers not as a calculation but as a structural warning: the effective rate will be higher than pure CGT, and the NIC exposure is real.
The exit outcome with the election in place: CGT and BADR
With a valid section 431 election in place, the whole gain from acquisition price to exit price is treated as a capital gain. The main CGT rates on share disposals are 18% within the basic-rate band and 24% above it (in force since 30 October 2024).
Where Business Asset Disposal Relief (BADR) applies, the rate is 18% from 6 April 2026 on up to a £1m lifetime limit of qualifying gains. BADR for ordinary shares requires meeting the personal-company test (broadly, 5% shareholding and officer or employee status for two years). That test and the detailed BADR conditions must be checked against the individual's position at disposal.
EMI option holders have a more favourable BADR route: EMI shares qualify for BADR under the two-year holding rule without needing to satisfy the 5% personal-company test. This concession does not extend to ordinary restricted shares. Keep those two regimes separate when advising founders who hold a mixture of ordinary shares and EMI options.
For founders in the basic-rate band, the section 431 election route means CGT at 18% (or 18% under BADR up to the £1m limit) on the full exit gain. The contrast with potential employment income rates on the same growth in the no-election column is the financial case for making the election on Day 1.
Where the section 431 election fits with growth shares and unapproved options
Growth shares and unapproved options both fall under the general employment-related-securities (ERS) rules. Source: gov.uk ERSM30450. Where those instruments carry restrictions, the section 431 election is relevant to the shares actually acquired, including shares acquired on exercise of unapproved options where those shares themselves carry restrictions.
The election applies to the shares, not to the option. Where a founder or employee holds unapproved options over shares that will carry leaver provisions on exercise, the section 431 question arises at the point of exercise (acquisition of the shares), not at the point of grant. At that moment, the 14-day clock starts running on the newly acquired restricted shares.
For more on how growth shares are structured and when they suit founders over other schemes, see the growth shares guide. For the basics of how option pools are set up and sized, see option pool basics for UK founders.
What to do next: getting the election signed within 14 days
The practical steps are straightforward but time-sensitive.
- Identify acquisition date: the date on which the shares are issued or transferred is Day 1. The election deadline is 14 calendar days from that date, not 14 business days.
- Prepare the election before completion: the election document should be drafted and ready to sign at the same time as the share subscription or transfer agreement. Do not treat it as a post-completion task.
- Both parties sign: the company (through a director) and the individual acquiring the shares must both sign the election. It is not valid if only one party signs.
- Keep the signed copy: HMRC does not require the election to be filed proactively, but it must be produced if requested. Keep a signed copy in the company's statutory records and a copy with the individual.
- Cover every acquisition event: if new restricted shares are issued at a funding round (whether to founders, employees, or advisers), each issuance is a separate acquisition and the election must be made within 14 days of each one.
The share schemes service covers the full share-scheme setup process, including section 431 elections at incorporation and at funding rounds, and links to the EMI scheme setup for companies that want tax-advantaged option grants alongside their ordinary share structure. For funded startups with institutional investors, getting this right at the round is particularly important: the leaver provisions that investors require are precisely the restrictions that make the election necessary. See the funded startups hub or the pre-seed founders hub for context on where the election sits in the broader share-scheme picture, or speak to the share schemes team to get the election prepared in time.