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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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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.

‘Legal options’ and other securities options

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 and, instead, the value of the securities awarded under the plan is 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.