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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Company Share Option Plan (CSOP): employee: CGT

The Capital Gains Tax consequences for the employee will depend on whether the option is

  • exercised by the employee
  • assigned or released
  • not exercised and lapses.

The capital gains treatment of the employee is in most respects the same as for options granted under an unapproved scheme, see CG56384. However, the Income Tax treatment of options granted under a CSOP will usually lead to shares acquired on the exercise of a CSOP option having a lower acquisition cost for Capital Gains Tax purposes than shares acquired on the exercise of an unapproved option.

If an option is granted and exercised in accordance with the provisions of an approved CSOP scheme and the option is exercised within certain time limits, there will normally be no charge to Income Tax in respect of the exercise of the share option, see Section 524 ITEPA03 and ERSM301100. Where S524 applies to prevent a charge to Income Tax, Paragraph 13 Schedule 7D TCGA92 specifically disapplies the market value rule, s17(1) TCGA92, as regards both the disposal and acquisition of the shares on the exercise of the option.

Thus, where there is no Income Tax charge on the exercise of a CSOP option, the acquisition cost of the shares acquired on exercise, see CG56384, becomes simply the total of

  • the amount actually paid for the option by the employee
  • the amount actually paid by the employee for the shares acquired on exercise of the option.

If the grant or exercise of the option is not in accordance with the rules of the approved scheme, or if options are exercised early or late, S524 ITEPA03 does not apply and Income Tax liabilities may arise. The acquisition cost of shares acquired on exercise of the option will then be the same as for unapproved share option schemes, see CG56384.

If an option is replaced see CG56387.

Normally there is no charge to Income Tax when an employment-related share option is granted. If, exceptionally, an option is granted within the rules of the CSOP scheme and the exercise price is less than the market value of the shares concerned at the time of grant, an amount may count as employment income under S526 ITEPA03, see ESSUM48350. TCGA92/Sch7D/para12 provides that this amount should be treated as additional consideration for the acquisition of the shares.

Previously, Section 185(3)(a) ICTA88 provided for there to be no Income Tax charge on exercise of the option; Section 185(3)(3)(b) provided the corresponding disapplication of the market value rule for Capital Gains Tax and predates that given by TCGA92/S144ZA for options generally, see CG12397.