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HMRC internal manual

Employment Related Securities Manual

Securities Options: securities options and "legal options"

Legal Contracts

In legal terms an option is a contractual legal entitlement given by one party (normally the employing company) to another, for consideration or under deed or seal. The 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. But offer and acceptance alone are sufficient to create a contract in Scotland.

However, as mentioned in ERSM110010, a right to acquire shares can be much wider than a contractual option, and can be created, for example, under the terms of an employment contract. Where a company declares a rights issue of shares this will give the holders of the original shares a “right” to acquire further shares, which can be within the wider definition of “option” in the legislation.

The term “legal option” will commonly be understood to describe an option which is a contractual legal entitlement given by one party (usually the employer) to another, for consideration or under deed or seal (see also ERSM110010). Where the option is granted under foreign law, other factors may be relevant.

The case of Abbott v Philbin (see ERSM110100) concerned a contractual option. The option in that case could be turned into money at the date when it was granted, even though it could not be transferred: Mr. Abbott could have made an agreement with a third party to exercise the option and transfer the shares to that third party.

References in this guidance to “legal options” (See for example ERSM70410) should be read as shorthand for rights to acquire securities that themselves constitute money’s worth for general earnings purposes on acquisition (See Employment Income Manual at EIM00530) in the way that the option in Abbott v Philbin constituted (in the taxation language of the time) a “perquisite” at the date of grant.

We do not accept that the same can be said for all rights to acquire securities. Long Term Incentive Plans (LTIPs) (see ERSM110010), Restricted Stock Units (RSUs) (see ERSM20192 onwards) and similar arrangements conferring rights to acquire securities are securities options but often involve an agreement or promise that falls short of being a legal option. In such cases we would not regard the acquisition of the right as the receipt of money’s worth. Until changes introduced by FA2016 and having effect for all securities options from 6 April 2016 (including options acquired before that date), the value of the securities awarded under the plan which was not a legal option was likely to be chargeable as money’s worth at the time of the acquisition of the securities themselves.

HMRC officers may obtain advice on options granted under the law of other countries from the Employee Shares and Securities Unit (ESSU) - see ERSM10040.

Securities options - no earnings charge on acquistion of securities from 6 April 2016

FA2016 introduced subsection (1A) into ITEPA03/S418 which made the new provision that Chpaters 1 and 10 of Part 3 do not have effect in relation to chargeable events (within the meaning given by ITEPA03/S477) occurring in relation to securities options.

So from 6 April 2016, for all securities options - regardless of whether or not they are ‘legal options’ - the acquisition of securities pursuant to the option will be taxed under Chapter 5 of Part 7 (see ERSM110500) and not as earnings.