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ACCA Strategic Professional · Advanced Taxation (UK) · Income tax: income from employment

Marcus, a higher rate taxpayer, is granted an unapproved (non-tax-advantaged) option over 5,000 shares in his employer, a quoted company, with an exercise price equal to the market value at the date of grant. Which statement correctly describes the income tax treatment?

Income tax is charged on exercise of an unapproved option, on the market value of the shares at that date less the exercise price paid. There is normally no charge on grant, and later growth after exercise falls under capital gains tax, not employment income.

  1. AIncome tax arises on the grant of the option, based on the market value of the shares at that date
  2. BIncome tax arises on exercise of the option, based on the market value of the shares at exercise less the exercise price paidCorrect
  3. CIncome tax arises only when Marcus later sells the shares, based on the sale proceeds less the exercise price
  4. DNo income tax ever arises, because the exercise price equalled market value at grant

Explanation

For an unapproved option there is normally no charge on grant. On exercise, the excess of the market value of the shares over the price paid is taxed as employment income (and for readily convertible assets such as quoted shares, NIC also applies). Taxing at grant is wrong because no charge arises then. Taxing only on sale is wrong because the employment income charge arises at exercise, with any later growth taxed as a capital gain.

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