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UK income tax charged on share options exercised by non-UK residents

Posted on 17 January 2022

The Court of Appeal ruled in Charman v Revenue and Customs Commissioners that the right to acquire securities arises at the moment a share option is granted, not when it vests.

The case involved Mr Charman, who was granted share options in Axis Speciality Limited  in 2001, at which point he was a UK resident. In 2003, Mr Charman was awarded share options, which vested in three tranches. Mr Charman became non-UK tax resident in 2003, and in 2008 exercised his share options and sold the shares, realising around $53 million, and making a profit of $33 million. HMRC issued closure notices and discovery assessments to tax those profits.

The First Tier Tribunal held that Mr Charman was liable to tax for first two tranches of shares which vested while he was tax resident in the UK, but not for the third tranche, which vested whilst he was tax resident in Bermuda. The Upper Tribunal reversed this decision, holding that Mr Charman acquired the right to securities when the options were granted and not vested, and so was liable for tax on all three tranches.

The Court of Appeal held that the right to acquire securities arises when options are granted, not vested. Importance was placed on the option having some financial value. Consequently Mr Charman was liable to tax in all three tranches. The Court of Appeal also separately held that Mr Charman benefitted from the shares due to his employment, meaning he was liable to income tax once the restrictions from the shares were lifted.

The Court of Appeal's ruling is significant, since individuals could now be liable to tax on the value of shares acquired regardless of their tax residence at the time of vesting, provided that the share options were granted whilst the individual was resident in the UK. This could have significant tax implications for individuals who plan to take shares and to change tax residence.

It is recommended that individuals who have share options seek advice before emigrating, as there may be a tax charge when the share options are exercised and/or sold, regardless of their tax residence at that time. It would also be prudent to consider future tax residence plans when purchasing and issuing share options, in order to avoid unforeseen tax charges.

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