HM Revenue and Customs Brief 30/09
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Issued 12 May 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
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
- any amount chargeable to income tax on the exercise of
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.
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Article Published/Sorted/Amended on Scopulus 2009-05-15 16:08:44 in Tax Articles