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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Securities acquired for less than market value: employee resident but not ordinarily resident in UK: overseas workdays up to 5 April 2015

Residence: options granted pre-6 April 2008:

Where an option is granted before 6 April 2008 to an employee resident but not ordinarily resident in the UK who performs the duties of the employment both in and outside the UK, HMRC will treat part of the gain on exercise of the option as relating to an employment not within the charge to UK tax.

Unless the facts show otherwise, the appropriate way to apportion any gain on exercise is to follow the international consensus reached by the Organisation for Economic Co-operation and Development (OECD) for the purposes of relief under double taxation treaties. For options exercised up to 5 April 2005, the basis of the apportionment is to apply the ratio of overseas workdays to total workdays over the entire period between grant and exercise. For exercises on or after 6 April 2005, the UK will look at the ratio over the period between grant and the date when the options vested (i.e. became exercisable). The overseas workdays proportion of the gain will not fall within Chapter 3C.

Interaction with treaties

In many cases, the UK’s practice of treating part of the gain as relating to an employment not within the charge to UK tax will mean that the individual will not suffer tax on the same income in the UK and a treaty partner State. However, mismatches may occur, especially where the treaty with another State apportions the gain on an alternative basis to the domestic approach. Where income is doubly taxed as a result, Foreign Tax Credit Relief is available in respect of foreign tax suffered on any part of the gain relating to unrelieved workdays (see examples at ERSM70423).

Chapter 3C charge

The portion of the gain which is regarded as within the charge to UK tax will be treated as the amount of the notional loan for the purposes of Chapter 3C, subject to any deductible amounts allowed by ITEPA03/S446T.

Any tax charge under ITEPA03/S446S or ITEPA03/S446U will not be subject to a further adjustment for overseas workdays.

If a series of options are exercised in successive years, then the taxation of each needs to be looked at individually.

The proportion of the gain on exercise attributable to overseas workdays should be calculated solely by reference to periods when the employee was not ordinarily resident in the UK. Where an employee becomes ordinarily resident between grant and exercise or grant and vesting (as appropriate), the proportion of the gain attributable to the period of ordinary residence will fall wholly within Chapter 3C without relief for overseas workdays.

Practical considerations

Workdays will not normally be seen on the SA returns. Officers should consider their normal enquiry and risk parameters when deciding whether an enquiry should be opened to check a computation provided. Officers should also check that the non-UK workdays claimed appear reasonable: cases are commonly seen of, e.g. non-UK workday claims for weekend days or bank holidays, which on enquiry prove to be incorrect.

For guidance on the effect of residence on charges under Part 7 generally, including Chapter 3C, from 6 April 2015 onwards, see ERSM162000.