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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Securities Options: what are securities options - cash alternatives

Share option plans: employee may substitute cash in place of securities

In some standard share option plans, the option gives the employee a right to receive securities, but they can choose to have the value paid in cash instead. As there is a right to receive securities, it is a ‘securities option’ and is taxable according to the provisions of Chapter 5 Part 7 of ITEPA.

Acquisition of the securities pursuant to an employment-related securities option is a ‘chargeable event’ under ITEPA03/S477 (3)(a), chargeable under ITEPA03/S476.

Alternatively, receipt of cash will be the receipt of a benefit in money or money’s worth in connection with the employment-related securities option, a ‘chargeable event’ under ITEPA03/S477 (3)(c), again chargeable under ITEPA03/S476.

Share option plans: employer may substitute cash in place of securities

Some standard share plans appear to give the employee a right to receive securities, but the employer has a reserved right to pay the cash equivalent instead. The question now is whether in view of the employer’s reservation the employee has a right to receive securities.

You need to consider all the facts; not only the plan rules, but why the employer’s reservation is there and how the plan operates in practice. For example, if: -

  • the option is specifically termed a “right” to acquire or receive securities,
  • the award of shares or securities is the employer’s usual practice (and the employee’s expectation), and
  • the employer’s reservation is for specific reasons which do not apply to the employee in question (e.g. to allow to employee participation in certain jurisdictions where securities laws or exchange controls effectively prevent the employee from owning securities directly),

then the option is likely to be a right to receive securities.

On the other hand, if: -

  • it is clear from the definition of the option that the right to receive shares or cash is entirely at the discretion of the employer, and
  • it is usual for the plan to deliver cash,

then it is likely that it should not be treated as a right to acquire securities for tax purposes.

In cases where doubt remains and there are taxation consequences, you should refer the case to ESSU - see ERSM10040.