In the absence of specific rules, the case of Abbott v Philbin
(39TC82) applies. This was more an issue before 16 April 2003 when
there were fewer specific rules to provide for taxation at exercise
when the main value passed to an employee. The case determined that
it is on the grant of an option that an employee received money's
worth and not on the exercise.
Mr Abbott was employed by a company that offered its
executives options to buy a number of its unissued shares at the
current market price. The options were not transferable, and would
last for 10 years, as long as the purchaser remained in the
company's service. The price of the option was £1 per 100
shares. Mr Abbot bought an option on 2,000 shares in October 1954,
paying £20. By March 1956 the market price of the shares had
risen, and he exercised his option on 250 shares, which were worth
£166 more than he paid for them.
The Revenue contended that Abbot had received an emolument
from his employment. The shares were worth £166 more than he
paid for them. This was a 'perquisite or profit whatsoever' and
should be included in his Schedule E assessment for 1955/56.
Abbot agreed that he had received a 'perquisite or profit
whatsoever'. However, he argued that the option itself was 'money's
worth' and the excess of the value of the option over the price
paid was assessable under Schedule E in 1954/55. The increase in
value of the shares did not arise from the employment, but from the
overall prosperity of the company.
This case went all the way to the House of Lords, and even
then the Lords were not unanimous in their decision. The majority
judgement went against the Revenue, because an option can be turned
into money. Even though (in this particular case) the option itself
could not be transferred, the holder could make an agreement with a
third party to exercise the option and transfer the shares to that
third party. Because it is money's worth, the value of the option
is an emolument of the year in which it is granted. Therefore there
can be no emolument when the option is exercised.
Because this would mean that the main part of the value
passed to the employee would escape taxation, specific rules are
contained in Part 7 of ITEPA, and earlier legislation, to override
this tax case in most circumstances, particularly in cases
involving options over securities other than shares.
