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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Employment-related securities: securities options: employee and transferor

The examples below demonstrate how the legislation works. They show the results where options are exercised on or after 10 April 2003 and the outcome where the options were exercised before that date.

A share option is granted to an employee. The employee gives no consideration for the option. The option entitles the employee to acquire 1,000 shares at £2 per share from an Employee Benefit Trust. The employee exercises the option, pays £2,000 and acquires 1,000 shares which, at the time they are acquired, have a market value of £5,000 (£5 per share).

The option could be either be granted under an unapproved share option scheme, be an Enterprise Management Incentives option see CG56440, or an option granted under an approved Company Share Option Plan on whose exercise income tax is payable (this may happen, for example, if an employee exercises an option early) see CG56425.

  • The employee will be chargeable under Schedule E on the difference between the market value of the shares when he acquires them (£5,000) and the amount he pays for the option (nil) and when he exercises the option (£2,000). He is therefore charged to income tax on £3,000. Section 38(1)(a) TCGA applies as if that £3000 had formed part of the consideration given by the employer for his acquisition of the shares - see CG56321A. But the effect of the decision in Mansworth v Jelley (75TC1) is that, where the option is exercised before 10 April 2003, the employee is deemed to acquire the shares at their market value at the date of exercise.
  • The grant of the option is by reason of the employment, but TCGA92/S149A prevents the substitution of the market value of the option for the amount actually given for the option where the grant was after 27 November 1995.
  • The acquisition of the shares when the option is exercised is by reason of the employment, and the market value rule is capable of applying. So where the option was exercised before 10 April 2003, the decision in Mansworth v Jelley applies. The market value of the shares at the time they passed to the employee is substituted for the consideration actually given, and no account is taken of the amounts given or received for the option. That rule is changed by TCGA92/S144ZA, so that where the option is exercised after 9 April 2003 the actual consideration given (augmented by the amount counting as income) is used in the computations.

Employee Benefit Trust’s disposal proceeds

Exercise after 9 April 2003   Exercise before 10 April 2003  
       
       
Received for option Nil    
Received for shares £2,000 Market value of shares £5,000
Disposal proceeds £2,000 Disposal proceeds £5,000

Employee’s acquisition costs

Exercise after 9 April 2003   Exercise before 10 April 2003  
       
       
Schedule E charge £3,000    
Paid for option Nil    
Paid for shares £2,000 Market value of shares £5,000
Acquisition costs £5,000 Acquisition costs £5,000