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Share option plans: employee may substitute cash in place of securities

In some standard share option plans, the option gives the employee a right to receive securities, but they can choose to have the value paid in cash instead. As there is a right to receive securities, it is a 鈥榮ecurities option鈥� and is taxable according to the provisions of Chapter 5 Part 7 of ITEPA.

Acquisition of the securities pursuant to an employment-related securities option is a 鈥榗hargeable event鈥� under ITEPA03/S477 (3)(a), chargeable under ITEPA03/S476.

Alternatively, receipt of cash will be the receipt of a benefit in money or money鈥檚 worth in connection with the employment-related securities option, a 鈥榗hargeable event鈥� under ITEPA03/S477 (3)(c), again chargeable under ITEPA03/S476.

Share option plans: employer may substitute cash in place of securities

Some standard share plans appear to give the employee a right to receive securities, but the employer has a reserved right to pay the cash equivalent instead. The question now is whether in view of the employer鈥檚 reservation the employee has a right to receive securities.

You need to consider all the facts; not only the plan rules, but why the employer鈥檚 reservation is there and how the plan operates in practice. For example, if: -

• the option is specifically termed a 鈥渞ight鈥� to acquire or receive securities,
• the award of shares or securities is the employer鈥檚 usual practice (and the employee鈥檚 expectation), and
• the employer鈥檚 reservation is for specific reasons which do not apply to the employee in question (e.g. to allow to employee participation in certain jurisdictions where securities laws or exchange controls effectively prevent the employee from owning securities directly),

then the option is likely to be a right to receive securities.

On the other hand, if: -

• it is clear from the definition of the option that the right to receive shares or cash is entirely at the discretion of the employer, and
• it is usual for the plan to deliver cash,

then it is likely that it should not be treated as a right to acquire securities for tax purposes.

In cases where doubt remains and there are taxation consequences, you should refer the case to ESSU - see ERSM10040.