The sale of shares acquired by means of an option exercise could give rise to a recoverable capital gains tax (CGT) loss, according to Deloitte, the advisory firm.

Paula Higgleton, head of the private clients practice at Deloitte, said: “While the tax case of Mansworth v Jelley in 2002 prompted a law change in respect of options exercised on or after 10 April 2003, in some cases, the losses can still be claimed back and action may be necessary before 31 January 2009.”

The case was complex and the effect is best illustrated by an example:

Suppose Mr A, a company executive, was granted options in an unapproved scheme to acquire shares in X plc for £6 per share. When the options were exercised the shares were worth £10 per share and so Mr A had a gain of £4 per share on which he would have needed to pay income tax. When the shares were sold, further gains would be subject to capital gains tax (CGT). For many years it was thought that the starting point for the CGT calculation (the ‘base cost’) was the value on exercise ie £10, so that a sale on the date of exercise would mean no further CGT to pay.

Paula Higgleton comments: “The surprising judgement in the Mansworth v Jelley case was that the base cost should actually be increased by the amount subject to income tax, increasing it in this example to £14 per share.  This would mean that a sale on the date of exercise would give a capital loss of £4 per share.  Shortly after the judgement, the law was changed back to what had previously been understood, in other words to give a base cost in this example of £10.”

Although the case was in 2002, the implications remain in cases where options were exercised before 10 April 2003, as follows:

• If the shares have already been sold, it is worth checking that the correct base cost has been used in the calculation, so that any losses available have been claimed. The time limit for doing this for losses made in 2002/03 is 31 January 2009, so early action is recommended. If gains have been made since the loss arose, then a tax repayment may be available;
• Losses for years up to 1995/96 can still be claimed, as no time limits apply to these years;
• If the shares are still held, again the records should be checked to make sure that the base cost is correct, ie it has been uplifted to reflect the amount subject to income tax on exercise, so that the correct tax is paid on a later sale.

Paula Higgleton adds: “The rules in this area are complicated and not that well understood. Taxpayers may find that time spent in checking their records can give a significant tax saving.”

Ends

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In this press release references to Deloitte are references to Deloitte & Touche LLP, which is among the country's leading professional services firms.  Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, whose member firms are legally separate and independent entities.  Please see www.deloitte.co.uk\about for a detailed description of the legal structure of DTT and its member firms.  The information contained in this press release is correct at the time of going to press.  For more information, please visit www.deloitte.co.uk.