Good leaver and bad leaver provisions

Good leaver and bad leaver provisions are compulsory transfer clauses, usually in the articles or a shareholders’ agreement, that require an employee or director shareholder who leaves to sell their shares at a price set by the reason for leaving. A good leaver typically receives fair or market value and a bad leaver the lower of what they paid and fair value, or sometimes nominal value. The provisions are contractual, so the drafting decides the outcome, but the employment related securities rules and capital gains market value rules shape the tax.

Where do leaver provisions come from?

There is no statutory leaver regime. Section 544 of the Companies Act 2006 says shares are transferable in accordance with the company’s articles, so any obligation to sell has to be written into the constitution or a contract. The model articles for private companies contain no compulsory transfer provisions; their only control is article 26(5), which lets the directors refuse to register a transfer.

That leaves two homes for leaver clauses:

Bespoke articles. Under section 33 the constitution binds the company and every member as if each had covenanted to observe it, so leaver provisions in the articles bind every shareholder, including people who join later. Adding them to existing articles requires a special resolution under section 21.
A shareholders’ agreement. This binds only the people who sign it, so each new employee shareholder must sign a deed of adherence.

Many companies use both: the articles contain the mechanics of the deemed transfer notice and price, and the agreement contains the covenants whose breach makes someone a bad leaver.

Who counts as a good or bad leaver?

The categories are whatever the documents say. Typical drafting treats these as good leavers:

death, or leaving because of serious ill health or disability;
retirement at an agreed age, or redundancy;
dismissal later found by a tribunal to be wrongful or unfair; and
anyone the board decides to treat as a good leaver.

Bad leavers are usually those dismissed for gross misconduct, those who resign within a set period, and those who break restrictive covenants. Some documents add an intermediate leaver category, where the proportion of shares sold at fair value increases with length of service, much like vesting under a share option.

How are the shares valued?

The articles usually set out three things.

The price formula

Category	Common price basis
Good leaver	Fair value, or market value
Intermediate leaver	Fair value for vested shares, the bad leaver price for the rest
Bad leaver	Lower of subscription price and fair value, or nominal value

What fair value means

“Fair value” is a defined term in the articles, not a statutory one. The definition should say whether the leaver’s holding is valued as a proportion of the whole company (no minority discount) or as a minority stake, what valuation date applies (the leaving date, the date the transfer notice is deemed given, or the date of valuation), and who decides if the parties cannot agree. The usual fallback is an independent accountant acting as an expert, whose decision is final except for manifest error.

Fair value under articles is not the same as tax market value. Section 272 of the Taxation of Chargeable Gains Act 1992 defines market value as the price the assets might reasonably be expected to fetch on a sale in the open market. HMRC’s Employment Related Securities Manual at ERSM30320 notes that a fair value offered on compulsory repurchase may be equal to, more than or less than that market value. For HMRC’s approach to valuing unquoted employee shares, see valuing shares for employee schemes.

Who buys

The leaver’s shares are normally offered first to the other shareholders pro rata, sometimes to an employee benefit trust or a new recruit, and finally to the company. A purchase by the company must comply with Part 18 of the Act; see company share buyback.

What is the procedure when someone leaves?

The articles deem a transfer notice to have been given on the leaving date or when the board serves notice.
The price is agreed or determined by the expert.
The shares are offered to the permitted buyers in the order set out.
The leaver signs a stock transfer form. Well drafted articles appoint a director as the leaver’s attorney to sign if they refuse.
The company registers the transfer or gives notice of refusal within two months of it being lodged (section 771), updates the register of members and issues new certificates. Stamp Duty on the transfer is covered in transferring shares.

How do leaver provisions affect the employee’s income tax?

Shares acquired by reason of employment are employment related securities under Part 7 of the Income Tax (Earnings and Pensions) Act 2003. Leaver provisions are relevant here because they can make the shares restricted securities.

Restricted securities. Section 423(2) covers provision for a transfer or forfeiture under which the holder will not receive at least market value. ERSM30320 gives the example of an employee who must sell at less than market value on leaving, and says the shares are both restricted and forfeitable.
The misconduct exception. Section 424(1)(b) says shares are not restricted only because the holder may have to sell when the employee leaves as a result of misconduct, unless the arrangements have a tax or national insurance avoidance purpose (section 424(2)). A bad leaver definition that also catches resignation goes beyond that exception.
Acquisition. Under section 425(2), no charge arises on acquisition if the forfeiture restriction will cease within five years. Leaver provisions with no end date do not meet that condition.
Chargeable events. Section 427 makes removal or variation of a restriction, and a disposal while the shares are still restricted, chargeable events.
Section 431 election. The employer and employee can jointly elect within 14 days of acquisition to be taxed on the unrestricted market value up front, which removes future Chapter 2 charges (ERSM30450).
Paying a good leaver too much. If shares are sold for more than their market value, Chapter 3D (sections 446X and 446Y) treats the excess as employment income.

See employment related securities for the wider regime, and EMI where leaver terms are attached to options rather than shares.

How is the leaver’s capital gain worked out?

A sale to other shareholders is a normal disposal for capital gains. But section 17(1) of the Taxation of Chargeable Gains Act 1992 deems a disposal to be at market value where it is not a bargain at arm’s length, or where it is made in connection with the person’s own loss of office or employment. A bad leaver selling at cost may therefore find the gain computed by reference to market value rather than the price received. If the company buys the shares, the proceeds may be taxed as a distribution unless the buyback conditions for capital treatment are met.

What does this look like in practice?

Illustration only. A sales director subscribed £5,000 for 5% of a company at nominal value. The articles say good leavers receive fair value with no minority discount, and bad leavers receive the lower of cost and fair value. When she leaves, the expert values the whole company at £800,000.

As a good leaver she receives 5% of £800,000, which is £40,000.
As a bad leaver she receives £5,000.
Because the bad leaver category includes resignation, her shares were restricted securities from the start. If a section 431 election was signed within 14 days of subscription, no further Chapter 2 charge arises when she sells.

What are the common mistakes?

Putting leaver terms only in a shareholders’ agreement that later employees never sign.
Leaving fair value undefined, or silent on discounts and the valuation date.
Making every dismissal a bad leaver event, which invites disputes and unfair prejudice petitions under section 994.
Missing the 14 day window for a section 431 election.
Having the company buy the shares without distributable reserves or the Part 18 approvals.
Assuming the leaver price is automatically the disposal proceeds for capital gains.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.