STSM113030 - Derivatives: options - stamp implications: exercise of an Option

Stamp Duty

0.5% Charge

Where:

  • rights under the terms of an equity option contract are taken-up and exercised; and
  • an instrument of transfer is subsequently executed which transfers on sale the underlying securities (i.e. ‘stocks or marketable securities’ as defined by section S122 Stamp Act 1891, represented by the option, then
  • 0.5% Stamp Duty charge can arise by virtue of Paragraphs 1 & 3, Schedule 13 Finance Act 1999.

The Stamp Duty charge is calculated by reference to the amount or value of the consideration payable under the terms of the option contract.

1.5% Charge

Where:

  • an instrument is executed pursuant to an exercise of an equity option contract to buy or sell; and
  • ‘stocks or marketable securities’ are transferred to a person (or his nominee) who issues a depositary receipt in respect of such ‘stocks and marketable securities’, or
  • are transferred to a person (or his nominee) whose business includes the provision of clearance services, then
  • a 1.5% Stamp Duty charge arises under sections 67(2) & (2A) and 70(2) & (2A) Finance Act 1986 respectively.

The Stamp Duty charge on the transfer instrument is calculated by reference to the amount or value of the consideration for the sale, or if higher, the market value of the securities transferred at the date the instrument is executed (s.67(2) (b) & (2A)/s.70(2)(b) & (2A) FA86).

The calculation of the 1.5% charge applies to options which are entered into on or after 25 November 2015 and exercised on or after 23 March 2016. For ooptions entered into prior to 25 November 2015, whether exercised prior to, or in and after 23 March 2016, the calculation of the 1.5% charge is by reference only to the option ‘strike price’.

Stamp Duty Reserve Tax (SDRT)

0.5% Charge

Where

  • rights under the terms of an equity option contract are taken-up and exercised; and
  • ‘chargeable securities’ (as defined in s99 FA86) underlying the option contract are agreed to be transferred; then
  • a 0.5% SDRT charge may arise under s.87 FA86

The SDRT charge is calculated by reference to the amount or value of the consideration paid in money or money’s worth ( s.86(1) & (6) FA86).

However the 0.5% SDRT charge is cancelled, where the transfer of ‘chargeable securities’ (pursuant to the exercise of an option) is settled by the execution of an instrument which is impressed with any relevant Stamp Duty or a Stamp Duty exemption/relief applies ( s.92 FA86).

1.5% Charge

Where:

  • following an exercise of an equity option contract to buy or sell;
  • ‘chargeable securities’ (as defined in s.99 FA86) are agreed to be transferred to a person (or his nominee) who issues a depositary receipt in respect of such ‘stocks and marketable securities’, or
  • are transferred to a person (or his nominee) whose business includes the provision of clearance services, then
  • a higher 1.5% SDRT charge arises by virtue of FA86/S93(4) & (4A) and FA86/S96(2) & (2A).

The SDRT charge on the agreement to transfer is calculated by reference to the amount or value of the consideration for the sale, or if higher, the market value of the securities transferred at the date of instrument is executed (s93(4)(b)(ii)/s.96(2)(b)(ii) FA86).

The calculation of the 1.5% charge applies to options which are entered into on or after 25 November 2015 and exercised on or after 23 March 2016. For options entered into prior 25 November 2015, whether exercised prior to, or on and after 23 March 2016, the calculation of the 1.5% charge is by reference only to the option ‘strike price’

Where following the exercise of an equity option contract ‘chargeable securities’ are transferred to a depositary receipt issuer or clearance service (or their respective nominees) within the UK CREST settlement system, CREST will automatically calculate the higher of the option ‘strike price’ and market value where the CREST Bargain Condition flag ‘RO’ - Result of Option has been checked.

A CREST member should threfore ensure that the ‘RO’ flag is checked when shares are to be transferred in CREST to a depositary receipt issuer or clearance service (or their nominee) following exercise of an equity option.

Alternative Clearance Service Charge

Where following the exercise of an equity option contract ‘stocks or marketable securities’ (Stamp Duty) or ‘chargeable securities’ (SDRT) are transferred to an operator of a clearance service which has an approved HMRC election in place under s.97A FA86, the securities are chargeable to Stamp Duty or SDRT at 0.5%.

This is calculated by reference only to the amount or value of the consideration paid (i.e. based on the option ‘strike price’.

See STSM021060 for information in information in calculation’market value’

See STSM031090 for the meaning of ‘chargeable securities

See STSM112010 for the meaning of option ‘strike price’

See STSM058000 for more information on the Alternative Clearance Service Charge