The Inland Revenue has provided some guidance on how it will treat options following the recent Court of Appeal decision in Mansworth v Jelley. The case may have favourable implications for anyone who has acquired shares as a result of exercising options granted under unapproved executive share option schemes, Enterprise Management Incentive arrangements or other share-option based long term incentive plans (but not under Inland Revenue approved CSOPs or SAYE schemes). The Inland Revenue guidance may be downloaded at www.inlandrevenue.gov.uk/cgt/manworth_jelley.pdf.
The effect of the decision (which the Inland Revenue has said it will not appeal) is that the capital gains tax liability for employees who have exercised unapproved options may be reduced (or even turned into a capital loss to off-set any other capital gains made in that or subsequent years). This is because the amount that can be used as the base cost for the purpose of the capital gains tax calculation is the market value of the shares at the time of exercise plus the amount on which income tax was payable at the time of exercise (previously the base cost of shares acquired on the exercise of unapproved share options was simply the market value of the shares at the time of exercise).
It may, therefore, be possible to claim relief from capital gains tax in these circumstances. The Inland Revenue has indicated that corrections can only be made for returns for the period ending 5 April 2001 onwards and for any returns which are still open (in respect of earlier years). Returns made for the period to 5 April 2001 were due by 31 January 2002 and therefore need to be corrected by 31 January 2003 if a correction is required. Returns for the period to 5 April 2002 (due by 31 January 2003) may also be corrected if they have already been submitted.
Action to be taken
If your employees are likely to be affected by this decision, they will need to check their self-assessment tax returns for the tax years 2000/01 and 2001/02. Your employees may also wish to consider taking advice from their own personal tax advisers to see if this change affects them personally.
Employees may correct their self-assessment tax returns by writing to their tax inspector setting out the corrections to their tax returns following the Mansworth v Jelley decision.
Alternatively, employees may submit a revised CGT form. This may be downloaded at:
www.inlandrevenue.gov.uk/pdfs/2000_01/capital_gains/SA108.pdf (for the 2000/01 form); and/or
www.inlandrevenue.gov.uk/pdfs/2001_02/capital_gains/SA108.pdf (for the 2001/02 form).
© Herbert Smith 2003
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