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

Tomas exercised an unapproved option over 20,000 quoted shares, paying £2 per share when the market value was £5.50 per share, and was taxed on the gain as employment income. He later sells all the shares for £7 per share. What is his chargeable gain before the annual exempt amount?

The chargeable gain is £30,000. The base cost of shares acquired under an unapproved option is the exercise price plus the amount taxed as employment income, £5.50 a share. Proceeds of £7 less £5.50, multiplied by 20,000 shares, gives £30,000.

  1. A£100,000, based on a base cost of £2 per share
  2. B£70,000, being the amount taxed as employment income
  3. C£130,000, based on proceeds plus the exercise price
  4. D£30,000, based on a base cost of £5.50 per shareCorrect

Explanation

On exercise, the shares are acquired at a base cost equal to the price paid plus the amount taxed as employment income, which is £2 + £3.50 = £5.50 per share. The gain is (£7 − £5.50) × 20,000 = £30,000. Using £2 as the base cost would tax the employment income again, giving £100,000.

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