Mansworth v Jelley

Share Options

The Court of Appeal handed down their decision in this case in December 2002. They found in favour of the tax-payer, opening up the possibility of tax repayment claims for hundreds of thousands of affected tax-payers.

On 8 January 2003, the Inland Revenue announced, via their web-site, that they would not be appealing to the House of Lords, although they have since introduced amending legislation in the 2003 Finance Act which restores the position to that which the Revenue had hitherto considered it to be. However, the new legislation only applies to share options exercised on or after 10th April 2003. Accordingly, tax reclaims remain possible for many individuals.

The Mansworth v Jelley decision impacts upon the exercise of options under unapproved share option schemes, Enterprise Management Incentive schemes and also upon options under Inland Revenue approved schemes exercised in an unapproved way, typically within three years of grant or within three years of a prior approved exercise. Before the decision, the Revenue view of the operation of the relevant legislation was that the capital gains tax base cost of the shares acquired on exercise was equivalent to market value. Where options were exercised and the underlying shares immediately sold, this generally meant that neither a capital gain, nor a capital loss arose. Usually, however, a small income tax repayment would arise as a result of selling costs, since employers make no deduction for such when assessing market value for PAYE purposes.

The impact of the decision is that the cost of such shares for capital gains tax purposes is equivalent to market value plus the amount upon which income tax is charged. Where options are exercised and the shares immediately sold, this will result in a capital loss, broadly equivalent to the amount on which income tax is levied. The sums involved are often substantial.

Individuals affected by the decision can re-open calculations submitted for all years going back to the year 1998/99 (and sometimes beyond) and lodge fresh loss claims. And if capital gains have arisen in the intervening years, they can claim to have their losses off-set and claim repayment of capital gains tax paid. Alternatively, the losses can be carried forward and set-off against any gains arising in subsequent years, presently without time limit.

In some cases, these new capital losses can be set against income, generating income tax, as opposed to capital gains tax, repayments.

Some individuals will have possible claims just waiting to be lodged. Others will need to take action to trigger their entitlement. We can offer advice on all aspects involving this case. For further information, please call Barbara Nicholas. She will be pleased to quote a fixed fee for, both, the initial consultation and, if relevant, the work involved in computing the loss and agreeing the relevant claims with the Inland Revenue.