ERSM110700 - Securities Options

Deferment of tax on option gains – pre-6 April 1984 options

Under ICTA88/S137 tax could be deferred for options which were:

• granted before 6 April 1984, and
• exercised after 5 April 1983.

As very few options granted by reason of employment last for longer than 10 years this relief is not often claimed. Where the conditions are met however it continues to be available.

Tax chargeable on the exercise of an option which was granted before 6 April 1984, and exercised after 5 April 1983, may be paid in five instalments if certain conditions are met. (Only three instalments were allowed for options exercised before 6 April 1983.) The conditions are as follows.

• The taxpayer must elect for this treatment within 60 days of the end of the year of assessment in which the option is exercised
• The option must have been granted in respect of an employment chargeable to tax under Case I of Schedule E
• The price paid for the shares on the exercise of the option must not be less than the market value of shares of the same class at the time the option was granted (If the option was granted before 6 April 1982 an exercise price of 90 per cent of the market value at the time of grant is enough.)
• The Schedule E assessment for the year must include tax of more than £250 which is attributable to the option exercise gain and there must be tax of more than £250 payable to the Accounts Office on that assessment.

Elections: time limit

The last date for an election is 4 June in the year of assessment following that in which the option is exercised. For example if an option is exercised in 2005-6 the last date is 4 June 2006.

Form of election

There is no set form for an election. You can accept any written statement from the taxpayer or agent which expresses a wish to pay the tax by instalments.

Late elections

Late elections should not be accepted. If an application for a late election is pressed, submit to ESSU for advice.

Cases to which it applies

The instalment treatment is only available if an option is actually exercised. It does not apply to assessments raised because of the assignment or release of the option, or in respect of any other event chargeable under ICTA88/S135. The exercise of an option granted in respect of an employment chargeable to tax under Case II or III of Schedule E may be charged to tax under ICTA88/S162. Instalment treatment is not available on the exercise of such an option.

Value of shares

You can accept that the option exercise price is not less than the value of shares of the same class at the date the option was granted, if

• the option exercise price was calculated by reference to the value of the shares at a date or dates within the period of thirty days before the grant, and
• the exercise price is not less than that value. (If the option was granted before 6 April 1982 it need only be 90 per cent of that value.)

Adjustment to option: ICTA88/S137 (2)

The option exercise price may have been reduced between the date the option was granted and the date it was exercised. This does not matter, provided

• the option exercise price was acceptable before the reduction, and
• the reduction was made only to take account of a variation in the share capital of the company issuing the shares, for example a bonus issue or a rights issue.

Option gains: calculation of tax which can be deferred

Calculate the tax attributable to the option exercise gain as if the gain was the highest part of the taxpayer's total income. For this purpose disregard

• Schedule E termination payments
• gains from insurance policies
• Schedule A premiums.

Remember that for instalment terms to apply there must be tax of more than £250 attributable to the option exercise gain. The instalment terms cannot apply if the tax payable on the assessment is less than £250, even if the tax attributable to the option gain is in fact more than this (see Hunt v Murphy STC41).

Deferment of tax on option gains: dates of instalments

The local Collector of Taxes is responsible for determining the due and payable dates of the tax to be paid by dates of instalments. Broadly however the tax is due and payable as follows.

• The first instalment - 14 days after the Collector first applies for payment
• The fifth instalment - on 5 April, five years after the year in which the option is exercised
• The second, third and fourth instalments - on intervening dates so that the payments are evenly spread.

It should be noted that, following an election, the tax is paid over five instalments - not over five years. Care should be taken when referring to the instalments to avoid reference to payment over a period of five years.

If a taxpayer who has elected for the instalment treatment later decides to pay any of the tax before the due and payable dates he or she is free to do so.

Bankruptcy: ICTA88/S137 (6)

If you hear that a taxpayer who is taking advantage of these provisions has become bankrupt, tell the Collector because in case of bankruptcy the tax becomes due and payable immediately.