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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Employment-related securities: Revenue & Customs Brief 30/09

Revenue & Customs Brief 30/09 was issued on 12 May 2009 to explain our revised view of what fell to be deducted in computing the chargeable gains accruing on the disposal of shares acquired by exercising an option when the market value rule in TCGA92/S17 applied and income tax was chargeable, as referred to in CG53621A. The text of the Brief is reproduced here.

“Shares acquired before 10 April 2003 by exercising employee share options - allowable deductions

For Capital Gains Tax purposes, the grant or acquisition of an option and the transaction entered into on the exercise of that option are treated as a single transaction. That single transaction is the acquisition or disposal of the asset transferred when the option is exercised - section 144 of the Taxation of Chargeable Gains Act 1992 (TCGA).

Where shares were acquired on the exercise of an option before 10 April 2003 and the ‘market value rule’ (section 17 TCGA) applies, the market value of the shares when the option is exercised is used for calculating capital gains or losses instead of the amounts actually paid for the option and on its exercise.

We have previously published guidance relating to unapproved employee share options and Enterprise Management Incentive share options exercised before 10 April 2003. The guidance explains how HMRC considered the gain or loss should be calculated on the disposal of shares acquired by such options - by deducting from the disposal proceeds both of the following:

* the market value of the shares at the time the option was exercised
* any amount chargeable to income tax on the exercise of that option.

We have now received legal advice that HMRC’s guidance is incorrect. Where the shares are treated as having been acquired at market value, that value is the full measure of their deemed cost of acquisition. The cost is not augmented by any amount chargeable to income tax on the exercise of the option. Thus in computing any capital gain or loss accruing on a disposal of the shares no deduction falls to be made of, or in respect of, any amount that is chargeable to income tax on exercising the option. Our guidance will be amended accordingly.

The change does not affect most people disposing of shares acquired through approved SAYE option schemes and approved Company Share Option Plans. It may affect those who acquired shares through these schemes if the market value rule applies to the share acquisition and income tax was chargeable on the gain on exercise; for example, if the option was exercised early.

Neither does the change have any effect in relation to disposals of shares acquired on the exercise of options on or after 10 April 2003 where section 144ZA TCGA provides that the market value rule does not displace the consideration given when an option is exercised after 9 April 2003.

Those affected by the change may need to make or amend a Self Assessment return or loss claim provided they are in time to do so.

HMRC will apply our new understanding of the law in cases where there is an open enquiry or appeal.”

For shares acquired on or after 10 April 2003 the market value rule in TCGA92/S17 does not apply when an option is exercised - see CG12397.