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HMRC internal manual

Capital Gains Manual

Employee share schemes: introduction: share options

An option is an agreement that gives a person the right - but not the obligation - to buy or sell something at a predetermined price on a specified day, or during a specified future period. See CG12300+. It is a legally enforceable right brought into existence by the creation of a contractual relationship between the person granting the option and the recipient.

A share option is an option to buy or sell shares. In the context of employee share schemes, the options will enable the employee to acquire the shares at a predetermined price and during a specified period. Often, the employee will pay a nominal consideration for the grant of the option.

If, during the life of the option, the value of the shares were to decrease below the price specified, there would generally be no point in the employee exercising the option. So, in practice, options are likely to be exercised in cases where the price that the employee has to pay is less than the open market value of the shares when he exercises the option.

For the purpose of the special Income Tax rules in Part 7 ITEPA03 a ‘securities option’ is defined simply as a right to acquire securities and may include rights or opportunities that would not otherwise be options. ‘Securities’ are defined for the purposes of Chapters 1 to 5 of Part 7 ITEPA03 to include a wide range of intangible assets in addition to shares. TCGA92/S288(1A) extends the scope of the capital gains option rules to include such employment-related securities options and treats the acquisition of securities pursuant to an employment-related securities option as the exercise of an option. This extension applies for securities options granted after 15 April 2003.

A simple offer of an option, or a resolution by the Board of the company that shares should be allotted, does not constitute a legally enforceable right to shares. However, in Scotland, offer and acceptance alone are sufficient to create a contract. Where options which would not be legally enforceable under English or Scottish law are claimed to have been granted subject to, and to be enforceable under, the law of some other country, you should submit the case to Employee Shares and Securities Unit, Room G52, 100 Parliament Street, in accordance with the final paragraph of ERSM110010.