TCGA 1992 s.144ZA – Application of market value rule in case of exercise of option

(1)[^F880 Subject to section 144ZB,^F880] This section applies where—

(a)an option is exercised, so that by virtue of section 144(2) or (3) the grant or acquisition of the option and the transaction resulting from its exercise are treated as a single transaction, and

(b) section 17(1) (“the market value rule”) applies, or would apply but for this section, in relation to—

(i)the grant of the option,

(ii)the acquisition of the option (whether directly from the grantor or not) by the person exercising it, or

(iii)the transaction resulting from its exercise.

(2)If the option binds the grantor to sell—

(a)the market value rule does not apply for determining the consideration for the sale, except, where the rule applies for determining the consideration for the option, to that extent (in accordance with section 144(2)(a));

(b)the market value rule does not apply for determining the cost to the person exercising the option of acquiring what is sold, except, where the rule applies for determining the cost of acquiring the option, to that extent (in accordance with section 144(3)(a)).

(3)If the option binds the grantor to buy—

(a)the market value rule does not apply for determining the cost of acquisition incurred by the grantor, but without prejudice to its application (in accordance with section 144(2)(b)) where the rule applies for determining the consideration for the option;

(b)the market value rule does not apply for determining the consideration for the disposal of what is bought, but without prejudice to its application (in accordance with section 144(3)(b)) where the rule applies for determining the cost of the option.

(4)To the extent that, by virtue of this section, the market value rule does not apply for determining an amount or value, the amount or value to be taken into account is [^F881 (subject to section 119A) the exercise price^F881] .

[^F882 (4A) In subsection (4) above “exercise price”, in relation to an option, means the amount or value of the consideration which, under the terms of the option, is—

(a)receivable (if the option binds the grantor to buy), or

(b)payable (if the option binds the grantor to sell),

as a result of the exercise of the option (and does not include the amount or value of any consideration for the acquisition of the option (whether directly from the grantor or not)).^F882]

[^F883 (5)Subsections (5) and (6) of section 144 shall apply for the purposes of this section and sections 144ZB to 144ZD as they apply for the purposes of that section.^F883^,^F879]]

Definitions used in section 144ZA 1

the option

(a) a share option (“the option”) has been granted to an individual—

(i) in accordance with the provisions of a Schedule 4 CSOP scheme, and

(ii) by reason of the individual’s office or employment as a director or employee of a company, and

(b) shares (“the relevant shares”) are acquired by the exercise of the option.

Defined in Sch.7D para.11(3) · see it in the full Act

Cases considering section 144ZA 3

The Trustees of the Morrison 2002 Maintenance Trust & Ors v Revenue And Customs

[2019] EWCA Civ 93 · 6 February 2019Limits

The scheme sought to use the actual consideration rule for options to avoid capital gains tax. The court held that this mechanism did not prevent a purposive, realistic analysis treating the arrangements as a disposal. (see paras [22]-[23]; [36]; [59])

Stephen Davies v The Commissioners for HMRC

[2018] UKUT 130 (TCC) · 30 April 2018Interprets

Section 144ZA(1) contains the two conditions that determine whether the section applies: the option must be exercised and treated as a single transaction, and the market-value rule must apply or otherwise have applied. The Tribunal held that these were the complete threshold conditions. (see para [17]) Section 144ZA(2) is an operative provision for one statutory category of option, rather than a further condition for section 144ZA to apply. It applies despite a discretion over whether the option holder’s rights are satisfied by a share transfer or cash. (see paras [17]-[21]; [31]) Section 144ZA(3) is the operative counterpart to subsection (2) for the other statutory category of option. The Tribunal held that subsections (2) and (3) divide, rather than restrict, the operation of section 144ZA. (see paras [17]-[18]) Section 144ZA(5) incorporates sections 144(5) and 144(6). The Tribunal applied that incorporation to the treatment of combined options and to the extended meanings of buying and selling. (see paras [16]-[17])

Revenue And Customs v Hutchinson

[2017] EWCA Civ 1075 · 26 July 2017Limits

Cited as the provision governing the base cost of options exercised after 9 April 2003. It did not govern the respondent's earlier exercises (see para [10]).

What each judgment says about section 144ZA is in the case-law panel in the full Act.

Amendments and notes

5 notes from legislation.gov.uk

Amendments

F879S. 144ZA inserted (10.7.2003) by Finance Act 2003 (c. 14), s. 158(1) (with s. 158(2))
F880Words in s. 144ZA(1) inserted (with effect in accordance with Sch. 5 para. 6(1) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 5 para. 1(2)
F881Words in s. 144ZA(4) substituted (with effect in accordance with Sch. 5 para. 6(1) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 5 para. 1(3)
F882S. 144ZA(4A) inserted (with effect in accordance with Sch. 5 para. 6(1) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 5 para. 1(4)
F883S. 144ZA(5) substituted (with effect in accordance with Sch. 5 para. 6(1) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 5 para. 1(5)