CG12397 - Options: market value rule: effect of TCGA92/144ZA

The effect of the decision in Mansworth v Jelley, see CG12396, was overturned by TCGA92/S144ZA. This restored the position to what we understood it to be before that decision. The new section 144ZA applies to the exercise of options on or after 10 April 2003, regardless of when an option was granted or acquired.

Option exercised on or after 10 April 2003

TCGA92/S144ZA prescribes how the market value rule is to apply when an option is exercised on or after 10 April 2003. In all cases, the disposal proceeds of the asset transferred on exercise of the option, and its acquisition cost to the other party, will take into account both the amount received or given for grant or acquisition of the option, and the amount payable under the option on its exercise. The market value rule will apply, if appropriate, to the amount for the grant or acquisition of the option (unless TCGA92/S149A provides otherwise, see CG56373). But the second element, the amount payable when the option is exercised, will always be the actual amount paid or received under terms of the option.

The person who exercises the option may have acquired it from the person granting it, or from a previous holder. In either case, the market value rule may apply to the grant or transfer] [disposal and acquisition] of the option (see the examples at CG12398 below).

Option exercised before 10 April 2003

TCGA92/S144ZA applies where options are exercised on or after 10 April 2003. Where options were exercised before that date, the decision in Mansworth v Jelley applied. So if an option was exercised before 10 April 2003, it is necessary to decide whether the market value rule applied to the transaction that took place when the option was exercised. If the market value rule applied to that transaction, the disposal proceeds of the underlying asset, and the acquisition cost in the hands of the person acquiring it, is the market value of the asset at the time the option was exercised. No amount received or paid at grant of the option is taken into account, although any capital gains tax charged on the grant of the option needs to be set off or repaid, see CG12317.