ERSM110510 - Securities Options

Computation of option gain

When an option is exercised, or there is another chargeable event (see ERSM110500), the taxable amount counts as employment income of the employee for the relevant tax year.

For chargeable events, the “relevant tax year” is the year in which the chargeable event occurs (ITEPA03/S476).

The taxable amount arising when a chargeable event occurs is:

AG – DA

where AG is the amount of the gain and DA is the deductible amounts (ITEPA03/S478).

Amount of gain – AG – on acquisition of securities

The gain on the acquisition of securities in connection with the exercise of an employment- related securities option is

amount of the gain AG = MV – C where

• MV is the market value of the securities at the time of acquisition, and
• C is the amount of any consideration given for the securities (ITEPA03/S479).

Amount of gain – AG – on assignment or release of option

On the assignment or release of such an option, the amount of the gain (AG) is the amount of consideration given for that assignment or release.

Amount of gain – AG – on benefit received

If a benefit is received in connection with the option, the amount of the gain (AG) is the amount or market value of the benefit received.

If there has been a transaction within the last 7 years which reduces the value of the securities for “non-commercial” reasons, the amount of any gain on receipt of securities from an employment-related securities option will be increased. The gain will be treated as it would have been without the transaction having taken place. “Non-commercial” transactions include those done for the purpose of avoiding tax and NICs and non-arm’s length inter-group transactions, other than a payment for group relief.

Deductible amounts – DA

Deductible amounts (DA), per ITEPA03/S480 are:

• any consideration given for the acquisition of an employment-related securities option.
• any expenses incurred in connection with the acquisition of securities or other chargeable event.
• any reduction in the market value of employment-related securities to which an associated person is beneficially entitled, where the reduction is due to the acquisition of the option or of the securities in connection with the option.
• the amount that counts as employment income by reason of a charge on the grant of an option at a discount under an approved CSOP.
• any amount that was treated as earnings in respect of the acquisition of the option,
• the amount of any gain by a previous option holder which would have been a deductible cost for the previous holder on assignment of the option (ITEPA03/S479 (2)(c) as originally enacted).

If consideration for the acquisition of an option has previously been deducted from a gain, the amount deducted cannot be applied again in calculating a further gain.

Further reliefs

See also details of further reliefs for NIC:

Example

In June 2003 Tom Staples is granted an option to acquire 1,000 shares at a price of £2 per share. £1 is paid as consideration for the grant of the option.

The option is exercised on 1 October 2006 when shares of the same class have a market value of £5 each.

If an employee exercises an option to acquire quoted shares and sells the shares acquired through the stock exchange on the same day that the option is exercised, the sale price of the shares may be accepted as the market value for the purposes of assessing the gain made on exercise.

In any other case (for example, if the shares are sold at a later date, or if the shares are unquoted shares) market value at the date of exercise should be established. Guidance on obtaining valuations of shares for this purpose is given at ERSM220000.