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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Securities Options: computation of option gain

When an option is exercised, or there is another chargeable event (see ERSM110500), the taxable amount counts as employment income of the employee for the relevant tax year.

The “relevant tax year” is the year in which the chargeable event occurs (ITEPA03/S476).

The taxable amount arising when a chargeable event occurs is:

AG - DA

where AG is the amount of the gain and DA is the deductible amounts (ITEPA03/S478).

Amount of gain - AG - on acquisition of securities

The amount of the gain (AG) on the acquisition of securities pursuant to an employment-related securities option is

MV - C where
  • MV is the market value of the securities at the time of acquisition, and
  • C is the amount of any consideration given for the securities (ITEPA03/S479).

Amount of gain - AG - on assignment or release of option

On the assignment or release of such an option, the amount of the gain (AG) is the amount of consideration given for that assignment or release.

Amount of gain - AG - on benefit received

If a benefit is received in connection with the option, the amount of the gain (AG) is the amount or market value of the benefit received.

Interaction with Chapter 3B

If securities are acquired pursuant to a securities option, and the market value of the securities was reduced by at least 10% by something done other than for genuine commercial purposes during the 7 years preceding the acquisition, a separate charge under ITEPA03/S446B may arise on the acquisition, in addition to the normal Chapter 5 charge. The amount of the ITEPA03/S446B charge will be equal to the non-commercial reduction in value of the securities. Similarly, if a securities option is assigned or released for consideration, or if a person receives a benefit in connection with such an option, and the consideration or benefit consists in securities which have been reduced in market value in the manner described, then that market value is taken to be what it would have been if the non-commercial reduction had not taken place (see ITEPA03/S479(7)).

Deductible amounts - DA

Deductible amounts (DA), per ITEPA03/S480 are:

  • any consideration given for the acquisition of an employment-related securities option.
  • any expenses (for example, stamp duty, broker’s fees and the like) incurred in connection with the acquisition of securities or other chargeable event.
  • any reduction in the market value of employment-related securities to which an associated person is beneficially entitled, where the reduction is due to the acquisition of the option or of the securities in connection with the option.
  • the amount that counts as employment income by reason of a charge on the grant of an option at a discount under an approved CSOP.
  • any amount that was treated as earnings in respect of the acquisition of the option (under the old rules),
  • the amount of any gain by a previous option holder which would have been a deductible cost for the previous holder on assignment of the option (ITEPA03/S479 (2)(c) as originally enacted),
  • any amount that has counted as employment income under Chapter 2 of Part 7A in relation to the option.

If consideration for the acquisition of an option has previously been deducted from a gain, the amount deducted cannot be applied again in calculating a further gain.

Further reliefs

See also details of further reliefs for NIC where the employer’s NICs is met by employee (at ERSM110520).

Example

In June 2003 Tom Staples is granted an option to acquire 1,000 shares at a price of £2 per share. £1 is paid as consideration for the grant of the option.

The option is exercised on 1 October 2006 when shares of the same class have a market value of £5 each.

Value of shares at exercise   £5,000
     
Less paid for shares (£2,000)  
Less paid for option (£ 1) (£2,001)
Share option gain charged to Income Tax and NICs in 2006/7   £2,999

If an employee exercises an option to acquire quoted shares and sells the shares acquired through the stock exchange on the same day that the option is exercised, the sale price of the shares may be accepted as the market value for the purposes of assessing the gain made on exercise. Normally with a cashless exercise the exercise and sale will take place on the same day. There may be circumstances where, with an exercise late on Day One and large number of securities placed with the broker, that the sales extend into Day Two. HMRC will accept the cashless exercise treatment whereby the actual sale price is used in these circumstances also. (See ERSM220060)

In other cases (for example, where sales of shares extend beyond the second day, or if the shares are unquoted shares) market value at the date of exercise should be established. Guidance on obtaining valuations of shares for this purpose is given at ERSM220000.