United Kingdom: Deductions on Shares Acquired prior to 10 April 2009 - 4 June 2009

Shares acquired before 10 April 2003 by exercising employee share options
- allowable deductions

For Capital Gains Tax purposes, the grant or acquisition of an option and
the transaction entered into on the exercise of that option are treated as
a single transaction. That single transaction is the acquisition or disposal
of the asset transferred when the option is exercised - section 144 of the
Taxation of Chargeable Gains Act 1992 (TCGA).

Where shares were acquired on the exercise of an option before 10 April 2003
and the 'market value rule' (section 17 TCGA) applies, the market value of
the shares when the option is exercised is used for calculating capital gains
or losses instead of the amounts actually paid for the option and on its exercise.

We have previously published guidance relating to unapproved employee share
options and Enterprise Management Incentive share options exercised before
10 April 2003. The guidance explains how HMRC considered the gain or loss
should be calculated on the disposal of shares acquired by such options -
by deducting from the disposal proceeds both of the following:

• the market value of the shares at the time the option was exercised


• any amount chargeable to income tax on the exercise of that option

We have now received legal advice that HMRC’s guidance is incorrect.
Where the shares are treated as having been acquired at market value, that
value is the full measure of their deemed cost of acquisition. The cost is
not augmented by any amount chargeable to income tax on the exercise of the
option. Thus in computing any capital gain or loss accruing on a disposal
of the shares no deduction falls to be made of, or in respect of, any amount
that is chargeable to income tax on exercising the option. Our guidance will
be amended accordingly.

The change does not affect most people disposing of shares acquired through
approved SAYE option schemes and approved Company Share Option Plans. It may
affect those who acquired shares through these schemes if the market value
rule applies to the share acquisition and income tax was chargeable on the
gain on exercise; for example, if the option was exercised early.

Neither does the change have any effect in relation to disposals of shares
acquired on the exercise of options on or after 10 April 2003 where section
144ZA TCGA provides that the market value rule does not displace the consideration
given when an option is exercised after 9 April 2003.

Those affected by the change may need to make or amend a Self Assessment
return or loss claim provided they are in time to do so.

HMRC will apply our new understanding of the law in cases where there is
an open enquiry or appeal.

For more information on UK Tax Rules for Share Schemes.

Posted by Dan Walter

Performensation: Equity Compensation for High Performance Companies.