CG56321A | Shares and securities: employee share schemes: employment-related securities: interaction with amounts charged to Income Tax

Employees may be liable to Income Tax if, for example, they acquire shares or securities by reason of their employment, whether directly or by way of exercising an option, free or for less than their market value. Other more complex arrangements may result in an employee receiving employment reward through, for example, an increase in value of shares or securities and amounts may be treated as income. For more detail see the Employment Related Securities Manual.

Section 119A of the Taxation of Chargeable Gains Act (TCGA) 1992 identifies certain events which may result in an amount counting as employment income in relation to employment-related shares or securities. Subsequently, in calculating the chargeable gain on a disposal of the shares or securities, an amount which has counted as employment income may fall to be added to the amount of any consideration given for the shares or securities. The effect is thus to prevent the same value difference being charged to both Income Tax and Capital Gains Tax. Section 120 TCGA 1992 applies similarly in relation to the events and Income Tax charges identified in that section. See CG56328 and section 119A TCGA 1992 and section 120 TCGA 1992. Section 119A TCGA 1992 and section 120 TCGA 1992 are mutually exclusive. They cannot both give rise to a deduction for an amount chargeable to Income Tax on the same event.

A complication arises where the market value rule in section 17 TCGA 1992 operates so that a person’s acquisition of an asset is deemed to be for a consideration equal to the market value of the asset, rather than the amount of the consideration given for the asset. In the light of legal advice we changed our view as to how section 119A TCGA 1992 and section 120 TCGA 1992 operate when the market value rule in section 17 TCGA 1992 applies to the acquisition by an employee of shares or securities such that there is then also a liability to Income Tax.

For disposals of shares acquired on the exercise of options on or after 10 April 2003, section 144ZA TCGA 1992 provides that the market value rule does not displace the consideration given when an option is exercised after 9 April 2003.