Mansworth v Jelley and Share Options: Revenue loses case in Court of Appeal

If you exercised shared options in the last 6 years then you could have a significant Capital Gains loss which you might be able to use to reduce your tax liability.

The Inland Revenue lost the case of Mansworth v Jelley in the Court of Appeal in December 2002 and announced on 8th January 2003 that they would not appeal. The Revenue have issued 2 further press releases making the relief available to even more people.

The case involved an employee who was granted share options while living abroad but who sold them after having returned to the UK. Until the court judgment was made he would have been made to pay capital gains tax on the difference between his buying price and the selling price. His argument was that from a tax point of view his cost of acquiring the shares was the market value upon exercising his options, not the actual figure paid.

The Revenue interpretation of the decision reached by the Court of Appeal will have ramifications for any employee who has exercised unapproved share options or approved options in an unapproved manner, not just those who were living overseas. If you believe you are affected please read on.

Summary of the position on Unapproved Options

The current status of Share Option law based on the Revenue interpretation is now as follows:

You have share options granted by reason of your employment where you paid nothing for the option. You pay £1,000 per share when you exercise them and you sell on the same day for £5,000. You must pay income tax on £4,000 the difference between £5,000 value and £1,000 price paid. This is not changed by the decision. However, if you generate a capital loss as a result of the decision, you may be able to set it against other gains and thereby substantially reduce your tax bill.

For example, in calculating your capital gain:

Our interpretation is that you can also claim for any loss which occurred in the tax year 1996/97 to be set against capital gains of later years which are in date. The position with any losses prior to that is not within the self-assessment rules.

Summary of the position on Overseas Options

If you were granted options whilst you were resident outside the UK and those options are exercised whilst you are in the UK then you will normally avoid UK tax.

Under the old rules you could only deduct the actual cost of acquisition from the sale proceeds. This could leave a significant gain liable to tax. Under the new rules you deduct the market value on the date you exercise the option - if this was the day you sold then there will normally be no tax.

Can we help you?
If you are affected by this decision then we may be able to help you. However time maybe short so our procedures must be very streamlined.

To establish whether you need our urgent assistance please e-mail us with the answers to the following questions:

1) What was the amount of your capital gains in the income tax year 2001/02 after deducting any losses or other reliefs i.e. the 12 months ending 5th April 2002.

2) What gains have you had which have been subject to income tax as part of your employment in each tax year 1997/98 to 2001/02?
Please give each year separately. The gains must arise on shares of a company for which you have been employed. Name the company concerned. If you had any share options exersised before 6th April 1996 then please give us the same details.

3) What date did you submit your tax return for the year 2001/02?

4) What value of capital gains were attributable to shares acquired under an option granted whilst you were overseas?

If the feel you are affected by the Mansworth Vs Jelley ruling or would like to find out more about the implications of this ruling, please call us at +44 (0)1223 507080 or email at info@tax.uk.com