CG12399 - Options: market value rule: examples: options other than employment-related share options
The following examples demonstrate the application of the market value rule in circumstances where assets are acquired or disposed of when options are exercised. They show the results both where options are exercised on or after 10 April 2003, and where the options were exercised before that date.
The examples involve various permutations of the possible application of the market value rule to grant, transfer or exercise of options. The permutations are shown in the table below.
Although the following examples all involve transactions between connected persons, the results would be the same if the transactions potentially fell within the market value rule for any other reason, such as the consideration being incapable of being valued or, for example, the option being granted by an employer to an employee in circumstances where TCGA92/S149A does not apply.
Market value rule applies to
| Example | Grant of option | Transfer of option | Exercise of option |
|---|---|---|---|
| Example 3 | Yes | -鈥� | Yes |
| Example 4 | No | Yes | No |
| Example 5 | Yes | Yes | Yes |
| Example 6 | No | No | Yes |
| Example 7 | No | Yes | Yes |
| Example 8 | Yes | No | No |
| Example 9 | Yes | No | Yes |
| Example 10 | Yes | Yes | No |
Example 3
B pays his father A 拢1,000 for the grant of an option entitling the holder to acquire an asset from A for 拢5,000. The market value of the option when it is granted is 拢2,000. B subsequently exercises the option and acquires the asset, paying 拢5,000. At the time of exercise of the option, the market value of the asset is 拢10,000. There is no employer/employee relationship between the parties.
- The grant of the option is a transaction between connected persons, so the market value of the option at the time of the grant is substituted for the actual consideration given and received. (Sections 18 and 17 TCGA92, see CG14550+.)
- The transfer of the asset from A to B is also between connected persons so, following the decision in Mansworth v Jelley, if the option was exercised before 10 April 2003, the market value of the asset at the time of transfer would be substituted for the consideration actually given, and no account would be taken of the amounts given or received for, or the market value of, the option. That rule is changed by TCGA92/S144ZA for options exercised on or after 10 April 2003, so that the only market value used is that of the option at the time it was granted.
A鈥檚 asset disposal proceeds
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option at grant | 拢2,000 | - | - |
| Amount received on exercise | 拢5,000 | Market value of asset at exercise | 拢10,000 |
| Disposal proceeds | 拢7,000 | Disposal Proceeds | 拢10,000 |
B鈥檚 acquisition cost
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option at | - | - | - |
| acquisition | 拢2,000 | 听 | - |
| Paid on exercise | 拢5,000 | Market value of asset at exercise | 拢10,000 |
| Acquisition cost | 拢7,000 | Acquisition cost | 拢10,000 |
Example 4
D is granted an option by C for 拢1,000. The acquisition is at arm鈥檚 length, and entitles the holder to acquire an asset from C for 拢5,000. D sells the option to his brother E for 拢800 at a time when the market value of the option is 拢1,100. E exercises the option and acquires the asset from C for 拢5,000. E and C are not connected. The market value of the asset when the option is exercised is 拢7,000. There is no employer/employee relationship between any of the parties.
- The grant of the option is a transaction at arm鈥檚 length, so no market value substitution is required.
- The transfer of the option from D to E is between connected persons, so the market value of the option at that time is substituted for the actual consideration paid by E to D. (Sections 18 and 17 TCGA92, see CG14550+.)
- The transfer of the asset from C to E when the option is exercised is not between connected persons, so there is no reason to substitute market value for the actual consideration passing.
C鈥檚 asset disposal proceeds
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Received for option | 拢1,000 | Received for option | 拢1,000 |
| Received on exercise | 拢5,000 | Received on exercise | 拢5,000 |
| Disposal proceeds | 拢6,000 | Disposal proceeds | 拢6,000 |
D鈥檚 transaction with the option
Acquisition cost of option 拢1,000
Market value of option at disposal 拢1,100
Chargeable gain 拢100
E鈥檚 acquisition cost of the asset
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option | 拢1,100 | Market value of option | 拢1,100 |
| Paid on exercise | 拢5,000 | Paid on exercise | 拢5,000 |
| Acquisition cost | 拢6,100 | Acquisition cost | 拢6,100 |
Example 5
G acquires an option from his father F for 拢1,000. The option entitles the holder to acquire an asset from F for 拢5,000. The market value of the option when it is granted is 拢2,000. G sells the option to his sister H for 拢1,500 at a time when the market value of the option has increased to 拢2,500. H exercises the option and acquires the asset from her father F for 拢5,000. The market value of the asset at that time is 拢10,000.
- The grant of the option is a transaction between connected persons, so the market value of the option at the time of the grant is substituted for the actual consideration given and received. There is no employer/employee relationship between any of the parties.
- The transfer of the option from G to H is also a transaction between connected persons, so the market value of the option at the time of the transfer is substituted for the consideration actually given and received.
- The transfer of the asset from F to H is also between connected persons. Following the decision in Mansworth v Jelley, if the option was exercised before 10 April 2003, the market value of the asset at the time of transfer is substituted for the consideration actually given, and no account is taken of the amounts given or received for, or the market value of, the option. That rule is changed by TCGA92/S144ZA for options exercised on or after 10 April 2003, so that the only market value used is that of the option at the time it was granted (for computing F鈥檚 disposal proceeds) or acquired (for computing H鈥檚 acquisition cost).
F鈥檚 asset disposal proceeds
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option | 拢2,000 | - | - |
| Received on exercise | 拢5,000 | Market value of asset | 拢10,000 |
| Disposal proceeds | 拢7,000 | Disposal Proceeds | 拢10,000 |
G鈥檚 transactions with the option
Market value of option at acquisition 拢2,000
Market value of option at disposal 拢2,500
Chargeable gain 拢500
H鈥檚 acquisition cost of asset
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option at | - | - | - |
| acquisition | 拢2,500 | - | - |
| Paid on exercise | 拢5,000 | Market value of asset at exercise | 拢10,000 |
| Acquisition cost | 拢7,500 | Acquisition cost | 拢10,000 |
Example 6
K is granted an option at arm鈥檚 length by J for 拢1,000. The option entitles the holder to acquire an asset from J for 拢5,000. K then sells the option at arm鈥檚 length to L for 拢1,700. L is connected with J. L exercises the option and acquires the asset from the connected person J for 拢5,000. The market value of the asset when the option is exercised is 拢10,000.
- The grant of the option is a transaction at arm鈥檚 length, so there is no reason to substitute market value for the actual consideration given and received.
- The transfer of the option to L by K is at arm鈥檚 length so there is no reason to substitute market value for the actual consideration given and received.
- But the transfer of the asset from J to L is between connected persons. Following the decision in Mansworth v Jelley, if the option was exercised before 10 April 2003 the market value of the asset at the time of transfer is substituted for the consideration actually given, and no account is taken of the amounts given or received for the option. That rule was changed by TCGA92/S144ZA for options exercised on or after 10 April 2003, so that the only market value that could be used is that of the option at the time it was granted or acquired. As both the grant of the option by J to K and the acquisition of the option by L from K were at arm鈥檚 length, no market value substitution is required. There is no employer/employee relationship between any of the parties.
J鈥檚 asset disposal proceeds
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Received for option | 拢1,000 | - | - |
| Received on exercise | 拢5,000 | Market value of asset at exercise | 拢10,000 |
| Disposal proceeds | 拢6,000 | Disposal Proceeds | 拢10,000 |
K鈥檚 transactions with the option
Cost of option 拢1,000
Proceeds of disposal 拢1,700
Chargeable gain 拢700
L鈥檚 acquisition cost of the asset
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Cost of option at acquisition | 拢1,700 | - | - |
| Paid on exercise | 拢5,000 | Market value of asset at exercise | 拢10,000 |
| Acquisition cost | 拢6,700 | Acquisition cost | 拢10,000 |
Example 7
N is granted an option by M at arm鈥檚 length for 拢1,000. The option entitles the holder to acquire an asset from M for 拢5,000. N sells the option to P, who is connected with both N and M, for 拢1,000, at a time when the market value of the option is 拢1,500. P exercises the option and acquires the asset from M at a time when the market value of the asset is 拢10,000. There is no employer/employee relationship between any of the parties.
- The grant of the option is a transaction at arm鈥檚 length and between unconnected persons, so there is no reason to substitute market value for the actual consideration given and received.
- The transfer of the option from N to P is a not a transaction at arm鈥檚 length, so the market value of the option is substituted for the amount actually paid by P.
- The transfer of the asset from M to P is between connected persons. Following the decision in Mansworth v Jelley, where the option was exercised before 10 April 2003 the market value of the asset at the time of transfer is substituted for the consideration actually given, and no account is taken of the amounts given or received for the option. If the option is exercised on or after 10 April 2003, the rule is changed by TCGA92/S144ZA, so that the only market value that could be used is that of the option at the time it was granted or acquired. P acquired the option other than by way of an arm鈥檚 length bargain, so the market value of the option at the time of acquisition by P is used.
M鈥檚 asset disposal proceeds
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Received for option | 拢1,000 | - | - |
| Received on exercise | 拢5,000 | Market value of asset at exercise | 拢10,000 |
| Disposal proceeds | 拢6,000 | Disposal Proceeds | 拢10,000 |
N鈥檚 transactions with the option
Cost of option 拢1,000
Market value of option at disposal 拢1,500
Chargeable gain 拢500
P鈥檚 acquisition cost of the asset
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option at | - | - | - |
| acquisition | 拢1,500 | - | - |
| Paid on exercise | 拢5,000 | Market value of asset at exercise | 拢10,000 |
| Acquisition cost | 拢6,500 | Acquisition cost | 拢10,000 |
Example 8
R is granted an option by Q for 拢1,000. The option entitles the holder to acquire an asset from Q for 拢5,000. Q and R are connected. The value of the option when it is granted is 拢2,000. R sells the option at arm鈥檚 length to S for 拢2,400. S is not connected with Q. S exercises the option and acquires the asset for 拢5,000 at a time when the market value of the asset is 拢10,000. There is no employer/employee relationship between any of the parties.
- The grant of the option is a transaction between connected persons, so the market value of the option at the time of the grant is substituted for the actual consideration given and received.
- The transfer of the option to S by R is at arm鈥檚 length, so no substitution of market value for the price actually paid is required.
- The transfer of the asset by Q to S is also at arm鈥檚 length, so there is no substitution of market value for the price paid under the option.
Q鈥檚 asset disposal proceeds
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option at grant | 拢2,000 | Market value of option at grant | 拢2,000 |
| Received on exercise | 拢5,000 | Received on exercise | 拢5,000 |
| Disposal proceeds | 拢7,000 | Disposal Proceeds | 拢7,000 |
R鈥檚 transactions with the option
Market value of option at acquisition 拢2,000
Disposal of proceeds 拢2,400
Chargeable gain 拢400
S鈥檚 acquisition cost of the asset
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Cost of option | 拢2,400 | Cost of option | 拢2,400 |
| Paid on exercise | 拢5,000 | Paid on exercise | 拢5,000 |
| Acquisition cost | 拢7,400 | Acquisition cost | 拢7,400 |
Example 9
V is granted an option by T for 拢1,000. V and T are connected. The option entitles the holder to acquire an asset from T for 拢5,000. The market value of the option when it is granted is 拢2,000. V sells the option at arm鈥檚 length to W for 拢2,500. W and T are connected. W exercises the option and acquires the asset from T, paying 拢5,000. The market value of the asset when the option is exercised is 拢10,000. There is no employer/employee relationship between any of the parties.
- The grant of the option is a transaction between connected persons, so the market value of the option at the time of the grant is substituted for the actual consideration given and received.
- The transfer of the option to W by V is at arm鈥檚 length, so no substitution of market value for the price actually paid is required.
- The transfer of the asset from T to W is between connected persons. Following the decision in Mansworth v Jelley, if the option was exercised before 10 April 2003 the market value of the asset at the time of transfer is substituted for the consideration actually given, and no account is taken of the amounts given or received for the option. If the option was exercised on or after 10 April 2003, the rule is changed by TCGA92/S144ZA, so that the only market value that could be used is that of the option at the time it was granted or acquired. W acquired the option by way of an arm鈥檚 length bargain, so there is no substitution of the market value of the option for the consideration actually given by W to V.
T鈥檚 asset disposal proceeds
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option at grant | 拢2,000 | - | - |
| Received on exercise | 拢5,000 | Market value of asset at exercise | 拢10,000 |
| Disposal proceeds | 拢7,000 | Disposal Proceeds | 拢10,000 |
V鈥檚 transactions with the option
Market value of option at acquisition 拢2,000
Disposal proceeds 拢2,500
Chargeable gain 拢500
W鈥檚 acquisition cost of the asset
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Cost of option | 拢2,500 | - | - |
| Paid on exercise | 拢5,000 | Market value of asset at exercise | 拢10,000 |
| Acquisition cost | 拢7,500 | Acquisition cost | 拢10,000 |
Example 10
Y is granted an option by X for 拢1,000. X and Y are connected. The option entitles the holder to acquire an asset from X for 拢5,000. The market value of the option when it is granted is 拢2,500. Y sells the option to Z for 拢3,000. Y and Z are connected, but Z is not connected with X. The value of the option when it is sold by Y to Z is 拢3,800. Z exercises the option and acquires the asset from X, paying 拢5,000. The market value of the asset when the option is exercised is 拢10,000. There is no employer/employee relationship between any of the parties.
- The grant of the option is a transaction between connected persons, so the market value of the option at the time of the grant is substituted for the actual consideration given and received. (Sections 18 and 17 TCGA92, see CG14550+.)
- The transfer of the option from Y to Z is also a transaction between connected persons, so the market value of the option at the time of the transfer is substituted for the consideration actually given and received.
- The transfer of the asset by X to Z is at arm鈥檚 length, so there is no substitution of market value for the price paid under the option.
X鈥檚 disposal proceeds
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option at grant | 拢2,500 | Market value of option at grant | 拢2,500 |
| Received on exercise | 拢5,000 | Received on exercise | 拢5,000 |
| Disposal proceeds | 拢7,500 | Disposal Proceeds | 拢7,500 |
Y鈥檚 transactions with the option
Market value at acquisition 拢2,500
Market value of option at disposal 拢3,800
Chargeable gain 拢1,300
Z鈥檚 acquisition cost of the asset
| Exercise on or after 10 April 2003 | - | Exercise before 10 April 2003 | - |
|---|---|---|---|
| Market value of option at | Market value of option at | 听 | 听 |
| acquisition | 拢3,800 | acquisition | 拢3,800 |
| Paid on exercise | 拢5,000 | Paid on exercise | 拢5,000 |
| Acquisition cost | 拢8,800 | Acquisition cost | 拢8,800 |