Capital Gains Tax on share options/shares

ClumsyPenguin

I have a question regarding Capital Gains Tax that I'd be extremely grateful for assistance with.

As an employee benefit, I was given a number of share options for the company I work for a few years ago. When the company initally listed (IPO) I didn't exercise the options (at the time due to the tax bill). At a later date, I exercised the options and paid the tax bill for the shares. A couple of years later, I sold a number of the shares, enough to take me over the CGT threshold.

I now have to file for self-assessment, but am unsure as to what the initial acquisition cost should be recorded as. Should it be the value of the share options at the point of IPO, or the point at which they were exercised, i.e. the point at which I first "owned" the shares? Suspect it is the former, but wanted to confirm!

Thanks!
Jamie

pjclar02

Hello Jamie

The base cost of the shares for capital gains tax purposes will depend upon the type of share option scheme in operation. Do you have any of the paperwork for the scheme?

Presumably it is an unapproved share scheme as a tax liability crystallised on exercise of the option?

If it is an unapproved share option scheme then the base cost for CGT will be the market value at the date you exercised the option. If it was unapproved option - you will have paid tax on the difference between the market value at the date of exercise and the price you paid for the option.

Hope this helps - but if you can confirm the type of share scheme I can comment accordingly.

ClumsyPenguin

Thanks for that. Yes, it is an unapproved scheme, so I paid the tax due when I exercised the options.

According to:
helpsheets/hs287.pdf on the hmrc.gov.uk website (can't post a direct link), it would appear that

exercising an unapproved share option after 9 April 2003, the capital gains cost of your shares is the total of:
• what you pay for the option (if anything)
• the price you pay for the shares when you exercise the option, and
• the amount chargeable to Income Tax on the exercise.

which gives me a completely different (and much lower) initial figure for the cost of the shares to me (as all I paid was the tax due), thus increasing the taxable amount. Does this seem correct?

Thanks,
Jamie

pjclar02

Yes - that is correct.

So in your circumstances:

What you paid for the option = nothing.
The price paid on exercise = nothing.

Therefore, your capital gains tax base cost will be equal to "the amount chargeable to income tax at exercise"

The amount chargeable to income tax at exercise would have been the market value at the date of exercise, less the amount you paid for the option (being nil).

So you should have paid tax on:

Number of options exercised * market value of share at exercise.

And whatever this number is, that is your base cost for CGT purposes.

Are you confusing "the amount chargeable to tax" with "the amount of tax paid"? The amount chargeable to tax will be the gross amount that appeared on your payslip as income, and from which tax was deducted.

Sorry slightly in haste but hope you can make some sense of this.