UK tax liability of shares acquired from exercise of options during a period of non-UK residence

UK tax liability of shares acquired from exercise of options during a period of non-UK residence

Mon 09 Nov 2020

The Upper Tribunal (UT) decision in John Charman has overturned the First tier Tribunal’s (FTT’s) decision on the chargeability to UK tax of shares acquired as a result of exercising an option in March 2008, which vested in Mr Charman in October 2004. 

Mr Charman became non-UK resident on 22 November 2003, and the FTT had considered he was not resident at the time he acquired an interest in shares as a result of the vesting in October 2004.  The FTT had earlier held that shares vested as a result of the first two periods of vesting (prior to November 2003) where subject to UK tax. 

As background, the options were awarded in November 2001 and vested in three tranches on the 1st, second and third anniversary of 20 Nov 2001.  Mr Charman became non-resident from 22 Nov 2003.  The options were subsequently amended in June 2003 to be effective from 1 October 2001, with vesting on the 1st, second and third anniversary of 1 Oct 2001.  The dispute to be resolved at the UT was whether the a right to acquire securities as a result of the option in relation to the third tranche arose in October 2004 (when Mr Charman was non-UK resident), or in 2001 (when he was UK tax resident).  In the latter case, he would have been taxable in the UK on exercising the option (under ITEPA s476), even if not UK resident at the time of exercise, as a result of ITEPA s474. 

Since the period covered by this case, the taxation of employment related securities options has changed twice, once for the period 6 April 2008 to 5 April 2015, and again for the period from 6 April 2015.  Some brief background on these changes is covered below, but please get in touch with a member of the Mazars employment or international tax team for further advice on the international aspects of employment related securities.

Background to taxation of securities options:

From 6 April 2008 to 5 April 2015 Part 7 of ITEPA had its own residence rules, at ITEPA03/S421E for securities and in ITEPA03/S474 for securities options. Whether or not UK tax was chargeable in relation to employment-related securities might depend upon where an employee resided at the time the securities or securities options were awarded. This was regardless of where the work to earn that award was carried out, and whether it related to UK or non-UK duties.

The new rules introduced by Finance Act 2014, having effect from 6 April 2015, put the taxation of employment-related securities in the hands of internationally mobile employees on a simpler, more orderly and principled basis that is designed to achieve UK taxation of share-based income that relates to UK duties. They reflect OECD principles for taxing shares and share options and are broadly in line with the taxation of cash earnings.  Tax is chargeable only on the portion of securities income that is not foreign securities income (where is represents either chargeable or unchargeable foreign securities income).

There is further information in HMRC’s employment related securities manual at ERSM160000,