Court of Appeal judgment on correct tax treatment of employee share options and restricted securities

The Court of Appeal has handed down its judgment in Charman v HMRC [2021] EWCA Civ 1804 concerning the taxation of sums realised by the exercise of share options by a taxpayer who at the date of grant was UK resident but had become, by the date of exercise, non-UK resident. The correct tax treatment depended on whether the taxpayer was resident on the date he acquired the share options (i.e. the right to acquire shares). The First-tier Tribunal found in favour of the taxpayer on this point in determining that he had acquired a “securities option” for the purposes of Chapter 5 of Part 7 ITEPA on each occasion when a tranche of the share options vested, rather than when the options had originally been granted. The Upper Tribunal allowed HMRC’s appeal, determining that the taxpayer had acquired the right to acquire the securities option at the time when the options were granted, not when they vested.  The Court of Appeal has upheld the Upper Tribunal’s decision, observing that “a right to acquire securities” in s.420(8) ITEPA does not require the right to be immediately exercisable, and is no less a right if the ability to exercise it does not vest until a future date or is contingent upon some future event.  All that is required is that an employee has a contractual or other legal right to acquire securities.

Separately, the Court of Appeal also upheld the decisions of the First-tier Tribunal and Upper Tribunal that the taxpayer had, following a share for share exchange, acquired his interest in the replacement restricted shares “as a director or employee” for the purposes of Chapter 2 of Part 7 ITEPA such that he was accordingly chargeable to income tax when the restrictions lifted.

A link to the Court of Appeal judgment can be found be found here

Akash Nawbatt QC and Sebastian Purnell represented HMRC.

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