See ERSM110500 for the taxation consequences and ERSM110060 for the exemptions where securities options are granted to employees.
Whenever an asset in the form of a security is acquired by an employee through his employment (employment-related security see – ERSM20210 and ERSM20220) and he acquires it free or pays less than its market value there will be a charge, because the employee who receives securities at less than their market value receives money's worth.
The securities can be sold for their full value and the difference between what can be got for them and what was paid for them is the measure of the perquisite or emolument, now termed employment income – see Weight v Salmon ( ERSM20510). It does not matter that the employee does not actually sell them. Even if the securities are received on the condition that they cannot be sold for a period of years, or without special permission, the employee still receives money's worth as there are other means than a sale of turning securities to pecuniary account – see Ede v Wilson ( ERSM20520).
Most of the legislation specifically related to employment related securities is in Part 7 ITEPA 2003. Income falling within Part 7 is treated as “specific employment income” (see ERSM20100), whilst other remuneration falls to be classified as “general earnings”. General earnings are subject to the residence rules in Chapters 4 and 5 of Part 2, whereas Part 7 is not (but has its own special rules – see ERSM20300).
General earnings is defined in ITEPA03/S62 (2)(b) as “any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth”". Subsection (3) goes on to define money’s worth as:
For the purposes of subsection (2) "money's worth" means something that is-
The old legislation under ICTA88/S19 made the same distinctions, but earnings were “emoluments”, which were defined at ICTA88/S131 as including “all salaries, fees, wages, perquisites and profits whatsoever.” Acquisition of shares was normally described as a perquisite of the employment.
See following pages for:
Example: shares acquired by employee
Cheryl Hastings is the managing director of Zorn Ltd. She is persuaded to join a rival company, Chester Ltd, by their offer to allow her to subscribe for 5,000 Chester Ltd ordinary 25p shares at par.
The shares were issued to Cheryl on the day she started work for Chester Ltd. The market value of the each share was then £1.87.
What amount, if any, is chargeable on Cheryl as employment income?
Cheryl receives shares from her employment. The market value on the date of issue is
£1.87 x £5,000 = £9,350,
but Cheryl pays only £1,250 - the par (face value) of 25p. The difference of £8,100 is charged under ITEPA03/S62, as it is a payment which is capable of being converted into cash (money's worth).
In certain circumstances the acquisition of securities for less than their market value may not be caught, or fully caught, by the money’s worth charge.
However a money’s worth charge takes priority over one under Chapter 3C, per ITEPA03/S446V. See ERSM70000 for further details.
Various provisions in Part 7 modify the money’s worth charge on acquisition of securities. They are:
