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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Securities Options: grant of option

If case law were followed, taxable earnings would arise only on the grant of an option, not on the subsequent exercise (Abbott v Philbin (39TC82), see ERSM110100). But specific legislation at ICTA88/S135 and later in Chapter 5 Part 7 of ITEPA over rides the general rule in most cases.

Up to 5 April 2015, for options acquired on or after 6 April 2008 there are specific rules in Chapter 5 which mean that for UK-resident employees there is usually no charge to Income Tax when an option is granted, and liability arises when it is exercised.

ITEPA03/S475 states that there is no liability to Income Tax on grant. The only occasion of charge on grant of an option is where the option was granted at a discount under an approved CSOP (ITEPA03/S475 (2)), or where options are granted to non-resident employees.

Non-resident employees are not within the scope of Chapter 5 and therefore do not qualify for the exemption within Section 475, and may therefore be chargeable on grant of the option. See Chapter 3C of Part 7 for more on the taxation consequences for these employees - ERSM70000.

For options granted before 6 April 2008, see ERSM160200.

From 6 April 2015, with the removal of the residence exclusion at ITEPA03/S474 (see ERSM20300), Chapter 5 can apply to securities options acquired whilst the employee is not resident in the UK and not carrying out duties in relation to a UK employment. See ERSM162000.

Long options - pre-16 April 2003

Where an option was granted prior to 16 April 2003, a charge to income tax arose on the grant of an option if it lasted for 10 years or more. For one granted before 6 April 1998 a charge arose on the grant of an option if it lasted for 7 years or more. These were sometimes called “long options” - see ERSM110200.