| Financial Benefits to Encourage Employee Participation |
11 |
16A.1.4.3 Options to Acquire Shares |
(a) Acquisition of option |
If E receives an option to buy shares, income arises under section 62 equal to the value of the option, ie the difference between the price payable under the option and the market value of the shares on the date of receipt of the option.20 If, therefore, the price payable under the option is the market value at the time of the grant, no tax is due under section 62. |
(b) Exercise of option |
If the shares rise in value before the exercise of the option a charge to tax will not arise under part 3 section 62 when the option is exercised.21 However a charge may arise under part 7 thanks to ITEPA section 476 (which does not apply, however, to the various favoured schemes). The reason why no charge arises under section 62 was explained by the House of Lords in Abbott v Philbin.22 There, E received an option to buy shares at £3.42 each, the market value at the date of the option, and exercised it in a subsequent tax year when the market value of the shares was £4.10. The House of Lords held that the emolument arose in the year the option was acquired, and at that time E received no benefit from it since he was merely given an option to buy at what was then full market value. The fact that the emolument subsequently increased in value did not mean that that increase in value was an emolument. Although this case has been reversed for options over shares—and now securities—it remains good for options over other types of property. |
(c) Disposal of shares |
Disposal will usually trigger a charge to CGT rather than income tax; any income tax could arise only under schedule D, case I. Since the asset disposed of is the shareholding, CGT will be charged on the gain realised after the acquisition of the shares. |