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HMRC internal manual

Capital Gains Manual

Options: cash-settled options: treatment of grantor

TCGA92/S144A (2), TCGA92/S144A (4)

Where an option is cash-settled, the grantor is treated as having disposed of an asset (namely, the liability to make the payment), and the payment is treated as an incidental cost of that disposal to be deducted from the consideration for the disposal, under TCGA92/S38 (1)(c).

The grant of the option and the later disposal are treated as a single transaction, at the time of the later disposal, and the consideration received for the grant of the option is treated as the consideration for the disposal.


In consideration of a payment by S to T of £20,000, T grants to S an option to buy from him within two years 10,000 shares in XYZ plc at £4 per share. The option agreement permits that on exercise T may make a payment to S instead of selling him or her the shares. The payment is to be equal to the excess of the market value of the shares at the date of exercise over the option exercise price. S exercises the option when the shares have a market value of £7 and the option is cash-settled with T paying (£7 - £4) x 10,000 = £30,000 to S.

T makes an allowable loss when the option is exercised:

Consideration treated as received for disposal of liability to make payment £20,000
less Deemed incidental costs of disposal £30,000
Allowable loss (£10,000)

If T has already been assessed on the £20,000 gain from the disposal of the option itself any tax charged in respect of that disposal should be discharged, and, if the tax has been paid, it should be set-off or repaid, see SAM12351+.

TCGA92/S144A applies also to options where there is a partial cash settlement. In such cases the section applies to the part of the option that is cash-settled. TCGA92/S144 (2), see CG12313, applies to the remainder. Sums received or paid are apportioned on a just and reasonable basis.