ERSM110030 - Securities Options

Changes from 16 April 2003

The principle changes to the operation of the chapter on options introduced by Schedule 22 of Finance Act 2003 (FA 2003) were:

• Broadening of definition of “security”.
• Replacement of “exercise” with “acquisition”.
• Abolition of long options charge on grant.
• Benefits in connection with options.

Definition of security

Schedule 22 FA 2003 widened the definition of security from 16 April 2003, to include items such as government gilts (see ERSM20110). Any options over the wider range of securities will be covered from that date. The new provisions are not "grandfathered". This means that the new rules apply even if the right was granted before 16 April 2003 over a security that was not covered by the legislation at the time the right was acquired. In such cases, the gain on exercise will be taxable if the securities are acquired on or after the 16th April 2003.

For shares covered by the previous legislation, as defined in ICTA88/S254 (1), company shares and company loan stock, the new legislation starts from the “appointed day”, 1st September 2003.

Example 1: gilts exercised before and after 16th April 2003

Matthew and Hannah are granted options over government gilts in 2001 by their employer. These can be exercised any time between 1 January 2003 and 31 December 2003.

• Matthew exercised his option at the earliest possible time, 1 January. This will be covered by the legislation as it applied before the changes introduced in Schedule 22 Finance Act 2003;
• Hannah still has her option at 16 April 2003. An option over gilts was not taxed under the old Chapter 5 because gilts were not securities as defined in ICTA88/S254 (1) . So the new Chapter 5 of Part 7 of ITEPA will apply to the exercise and bring any gain into charge.

Exercise no longer basis of charge

The old legislation on options was based on a chargeable event occurring on exercise of the option. This failed to include Long Term Incentive Plans (LTIPs) where there was a non- contractual right to acquire securities but no exercise was required – the employee was just given them at vesting. The equivalent chargeable event is now, per ITEPA03/S477 (3)(a), the acquisition of securities pursuant to the employment-related securities option.

Example 2: LTIP

Edmund was awarded a Long Term Incentive Plan (LTIP) in September 2001. He will not be able to acquire shares under it until November 2003, when he intended to be outside the UK. The new rules will bring the award within the definition of securities from 16 April 2003 but the acquisition of shares must occur on or after 1 September 2003 to be within the charge to income tax and NICs. If the exercise takes place before that date it will be dealt with under the previous legislation.

Repeal of “long options” charge

Previously there was a long options charge on grant of the option where the option was capable of lasting for more than ten years. This was removed with effect from 1st September 2003 for shares and company loan stock and from 16th April 2003 for other securities.

Benefits in connection with options

A new chargeable event on a benefit in connection with an employment-related securities option was introduced for share and loan stock options with effect from 1st September 2003 for shares and company loan stock and from 16th April 2003 for other securities.