An employee wishes to exercise an option to acquire securities in the listed employing company or its parent company at an exercise price of, say, £1 when the quoted price is £5. Before the option is legally exercised, the employee agrees with the employer to what is often referred to as a "cashless exercise". This means that, at the point of exercise, either:
There can be difficulties in establishing the market value for
the purposes of calculating the gain on exercise, because the
broker may sell the securities in various tranches during the day
so as not to flood the market. Prices fluctuate during the day and
the price or prices obtained may not equal the
“quarter-up” figure as required by TCGA92/S272.
Normally the market value of listed securities, i.e. the
amount those securities might reasonably be expected to fetch on a
sale in the open market, is arrived at using the prices in the
Stock Exchange Daily Official List, which is prepared at the end of
each day's trading.
However, it is sometimes possible to ascertain a precise figure
for the market value of the securities acquired. This can be done
where, prior to the exercise of the option, the employer and
employee have entered into a contract, arrangement or agreement
(the cashless exercise) and as a result the employee is obliged to
sell at least the number of securities required to fund the
exercise price and/or the PAYE/NIC liabilities immediately after
exercise.
In those circumstances, provided the sale is in the open
market,
the market value persecurity of all the securities acquired on the
exercise of the option may be accepted as equal to the sale price
per security sold for the purposes of computing the option gain
under ITEPA 03/S477. The same value will be used both for the
securities acquired and immediately sold and for any securities
retained.
Normally with a cashless exercise the exercise and sale will
take place on the same day. There may be circumstances where, with
an exercise late on Day One and large number of securities placed
with the broker, that the sales extend into Day Two. HMRC will
accept the cashless exercise treatment whereby the actual sale
price is used in these circumstances.
Where sales extend beyond the second day the quarter-up
price for Day One will need to be used for establishing market
value at exercise.
Where a large number of deals extend over one or two days and the proceeds acquired by each employee are the average sale price for all employees, that price may be used for each employee.
However, where one or all of the purposes of a contract, arrangement or agreement, which purports to be a cashless exercise, is the avoidance of tax and/or NIC then the market value of the securities sold may not provide an accurate measure of the amount which the securities "might reasonably be expected to fetch on a sale in the open market". In such circumstances the price given by the Official List will be appropriate.
