ERSM110110 - Securities Options

Grant of option

If case law were followed, taxable earnings would arise only on the grant of an option [Abbott v Philbin (39TC82), see ERSM110100]. But specific legislation at ICTA88/S135 and later in Chapter 5 Part 7 of ITEPA overrides the general rule in most cases.

With effect from

• 1st September 2003 for shares and company loan stock, and from
• 16th April 2003 for other securities,

there are specific rules in Chapter 5 which mean that for resident and ordinarily resident employees there is usually no charge to Income Tax when an option is granted, and liability arises when it is exercised.

ITEPA03/S475 states that there is no liability to Income Tax on grant. The only occasion of charge on an option granted is where the option was granted at a discount under an approved CSOP (ITEPA03/S475 (2)), or where options are granted to

• Non-resident or not ordinarily resident employees whose earnings are not taxed under either ITEPA03/S15 or ITEPA03/S21 (see note below about Case 1 Schedule E);
• Non-domiciled employees who are resident but not ordinarily resident and are working for a foreign employer;

who are not charged under Chapter 5 and therefore do not qualify for the exemption on grant. See Chapter 3C of Part 7.

Old long options

Where an option was granted prior to 16 April 2003 a charge to income tax arose on the grant of an option if it lasted for 10 years or more. For one granted before 6 April 1998 a charge arose on the grant of an option if it lasted for 7 years or more. These were sometimes called "long options" see ERSM110200.

Meaning of ‘Case 1 Schedule E’

ITEPA03/S15 applies to earnings for any year in which the employee is resident, ordinarily resident and domiciled in the UK.

ITEPA03/S21 applies to earnings for any year in which the employee is resident and ordinarily resident but not domiciled in the UK. However, ITEPA03/S21 does not apply to the earnings of a non domiciled employee from employment with a foreign employer where the duties of the employment are performed wholly outside the UK.

See EIM40101 for further guidance on ITEPA03/S15 and ITEPA03/S21.