A taxpayer has lost his case at the Court of Appeal (CoA) concerning the relevant date for income tax purposes of employment related securities. The taxpayer had agreed to join a new insurance company and as part of his compensation package he was awarded options over shares in the new company that would vest to him over the first three years of his employment. The shares ultimately became quite valuable.
The taxpayer eventually left the UK and stopped being resident for tax purposes. Where it was held that the relevant date was the vesting date then for the last tranche of options, these would have vested to him when he wasn’t tax resident so any UK tax due on the eventual exercise of the options would not be payable.
The CoA found that the relevant date for tax purposes was the date of grant so all options were taxable in the UK. One of the deciding points, other than a purposive interpretation of the legislation, was that it is typical for employees or directors to contribute to the value of options at the date of grant rather than at the date of vesting.
The CoA also held that when underlying shares changed, as there was change in the immediate parent company of the new insurance company, that the shares so acquired were still employment related securities. The reason the taxpayer had the shares, or options over them, was due his employment status and not the fact that he had had an interest in the prior company’s shares.
The decision can be found at: John Charman v The Commissioners for HMRC – Find case law (nationalarchives.gov.uk)
This case has helpfully clarified the relevant date for the acquisition of employment related securities by way of options. Many option awards are structured to vest over long periods as a method of retaining employees in the longer term, so this clarity helps with the eventual tax treatment.
Please contact us if you have any question over the taxation of employment related securities or are considering a tax-advantaged scheme. We are experienced with these issues.
