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HMRC internal manual

Capital Gains Manual

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Options: market value rule: Mansworth v Jelley: options exercised before 10 April 2003

In the case of Mansworth v Jelley (75TC1) the Court of Appeal held that, where an asset changed hands on the exercise of an option, the market value rule would apply only to the single transaction provided by TCGA92/S144, see CG12313+, namely the disposal and acquisition of that asset. So if the market value rule applied to that transaction, the disposal consideration (and acquisition cost of the asset to the other party) for the purpose of tax on chargeable gains was the market value of the asset at the time the option was exercised. The fact that the acquisition was made by way of an option was ignored, and the disposal proceeds, and the acquisition cost of the asset to the person acquiring it under the option, were solely based on the market value of the asset at the time the option was exercised. Any actual or deemed consideration for the grant of the option itself was ignored.

This judgement overturned the previous general understanding of the operation of the market value rule on the exercise of an option, so that, in cases where an asset changed hands on the exercise of an option and the market value rule could apply to the disposal and acquisition of that asset, there was no longer consistency (see CG12395) with the case where the market value rule did not apply.

The case of Mansworth v Jelley involved shares acquired on the exercise of a non-approved employee share option, though on the facts of the case there was no amount chargeable to income tax as employment income, but the decision was applicable to the exercise of any option if the market value rule could apply to the transaction.

The decision in Mansworth v Jelley applies to options exercised before 10 April 2003. So if an option was exercised before that date, it is necessary to decide whether the market value rule applied to the transaction that took place when the option was exercised. If the market value rule applied to that transaction, the acquisition cost of the underlying asset in the hands of the person acquiring it (and the disposal proceeds of the person disposing of it), is simply the market value of the asset at the time the option was exercised.

For options exercised on or after 10 April 2003 see CG12397.