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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Securities Options: Abbott v Philbin

Mr Abbott was employed by a company that offered its executives options to buy a number of its unissued shares at the current market price. The options were not transferable, and would last for 10 years, as long as the purchaser remained in the company’s service. The price of the option was £1 per 100 shares. Mr Abbott bought an option on 2,000 shares in October 1954, paying £20. By March 1956 the market price of the shares had risen, and he exercised his option on 250 shares, which were worth £166 more than he paid for them.

The Revenue contended that, on exercising his option, Abbott had received an emolument from his employment. The shares were worth £166 more than he paid for them. This was a ‘perquisite or profit whatsoever’ and should be included in his Schedule E assessment for 1955/56.

Abbott agreed that he had received a ‘perquisite or profit whatsoever’. However, he argued that the option itself was ‘money’s worth’ and the excess of the value of the option over the price paid was assessable under Schedule E in 1954/55. The increase in value of the shares did not arise from the employment, but from the overall prosperity of the company.

This case went all the way to the House of Lords, and even then the Lords were not unanimous in their decision. The majority judgement went against the Revenue, because an option can be turned into money. Even though (in this particular case) the option itself could not be transferred, the holder could make an agreement with a third party to exercise the option and transfer the shares to that third party. Because it is money’s worth, the value of the option is an emolument of the year in which it is granted. The Revenue conceded that, if the option itself was an emolument when it was granted, there was no emolument when the option was exercised.

Because this would mean that the main part of the value passed to the employee would escape taxation, specific rules are contained in Part 7 of ITEPA, and earlier legislation, to override this tax case in most circumstances, particularly in cases involving options over securities other than shares.