In John Charman v HMRC [2021] EWCA Civ 1804, the Court of Appeal held that share options were taxable when they were granted not when exercised, and restricted shares were issued by virtue of the taxpayer's employment.

  • In November 2001 Mr Charman became an employee of a Bermudan company and was simultaneously awarded share options, exercisable in three tranches in November 2002, 2003, and 2004. They were conditional upon his continued employment with the company.
  • In October 2002 he was awarded restricted shares in the company, the restrictions to be lifted in September 2005.
  • In December 2002 as part of a recapitalisation, shares in the company were exchanged for shares in another company. The original shares were cancelled.
  • In January 2003 he was awarded further options also exercisable in three tranches over three years, stated to be effective as of October 2001.
  • In March 2008 he exercised some of his share options and sold them realising approximately $53 million and a profit in excess of $30 million.
  • HMRC disagreed with Mr Charman as to when the options were taxable and issued Discovery assessments. HMRC claimed it was the date of grant whereas Mr Charman said it was the date of exercise.
  • Mr Charman’s residency status also fell to be determined by the First Tier Tribunal (FTT) who found that he became non-UK resident in November 2003.

The First Tier Tribunal (FTT) had determined that:

  • The terms of the share option awards made them taxable on the date of exercise and not on grant. As Mr Charman was found by the tribunal to be Non-UK resident on the date that the third tranche of options were exercised, they escaped UK tax.
  • When the restrictions were lifted on the restricted shares in 2005 a charge arose under s.427 ITEPA even though he was no longer UK resident because he was UK resident in October 2002 when the shares were acquired.
    • He acquired the shares by reason of his being an officer or employee.
    • Mr Charman claimed he acquired them by reason of being a shareholder. He supported this view on the grounds that the shares he owned in 2005 were not the original shares, but shares received by way of the 2002 share exchange by virtue of already being a shareholder.
  • HMRC appealed the first point and Mr Charman the second.

The Upper Tribunal (UT) allowed HMRC’s appeal finding that:

  • The options were acquired at the dates of grant in November 2001 and January 2003, at which times Mr Charman was UK resident meaning that all of the options were subject to UK tax.

They dismissed Mr Charman’s appeal agreeing that the restricted shares were acquired by reason of Mr Charman’s employment.

Mr Charman appealed the UT’s decision on both counts. The Court of Appeal dismissed his appeals:

  • A 'securities option' is 'a right to acquire securities' and is no less a right if the ability to exercise that right either does not vest for a period of time or is contingent upon a future event. The legislation does not say that the right must be immediately exercisable, all that is required is that the employee has a contractual or other legal right to acquire securities.
    • Mr Charman acquired a right to acquire securities when the options were granted, not when they vested.
  • It was not necessary to show that the shares were acquired by reason only of employment. Here there was more than one reason but the ultimate one was Mr Charman’s employment.
  • The effect of the share for share exchange was that his rights as an employee had changed in form but not substance. This did not mean that a share exchange could never lead to a situation where the resultant shares were not enjoyed by reason of employment. The position might be different if, for example, the share exchange came about as a result of a contested take-over of the employer some years after the employee received shares in the employer.
    • The lower courts had correctly decided that there was a charge under s.427 in 2005 when the restrictions were lifted despite Mr Charman’s non-residency status at that time.

Useful guides on this topic

Employment Related Securities
What are the tax consequences when a company gives shares to an employee or director? What are employment-related securities? What is best: shares or share options? How do you set up a share scheme?

ABC or alphabet shares: directors & employees
Can you set up different classes of shares? How do you create Alphabet or ABC shares? What are the rules in giving different classes of shares to directors and employees? 

Statutory residence test toolkit
This is a freeview interactive tool to determine 'At a glance' whether you are UK resident or not in a tax year for 2013/14 onwards.

Residence v non-residence: tax treatment 
What are the differences between being UK resident and non-UK resident for UK tax purposes?           

SRT: Statutory Residence test
What is the statutory residency test? Why is it important and how does it work?

Non-resident Tax Toolkit
This toolkit covers the key UK tax issues for non-UK resident individuals holding UK assets and property and working in the UK.

External link

John Charman v HMRC [2021] EWCA Civ 1804 

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