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Tribunal confirms ‘base cost’ of shares acquired under employee options

'Base cost’ of shares acquired under employee options

The ‘market value’ rule does not apply to shares acquired on the exercise of employee share options which may be settled in cash.


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For Capital Gains Tax (CGT) purposes, the basic rule is that individuals who obtain shares by reason of employment are treated as having paid market value on the date of acquisition (the ‘market value’ rule).

However, for shares acquired under employee share options, the ‘market value’ rule is displaced by TCGA 1992, section 144ZA.  

In summary, this provides that where an option binds the grantor to sell, for CGT purposes the shares are treated as acquired for consideration equal to:

  • The actual price paid for the shares (i.e. the option exercise price); plus
  • Any amount that counts as UK source employment income on exercise.

In many cases, the CGT ‘base cost’ of shares under this rule will be the same as that which would have arisen had the ‘market value’ rule applied.

However, for some internationally mobile individuals, the CGT base cost will be lower than it would have been under the ‘market value’ rule.  

The taxpayer’s argument

Mr Davies exercised non-tax advantaged share options in three tranches in 2005/06.  In each case, exercise was satisfied by the delivery of shares.

However, the terms of the options gave Mr Davies’ employer the right to settle by way of a cash payment, rather than by delivering shares.

Mr Davies argued that this meant the options did not ‘bind the grantor to sell’ and, therefore, that the special CGT base cost rule did not displace the ‘market value’ rule.  On this basis, Mr Davies claimed that a capital loss arose on disposal of the relevant shares.

The Tribunals’ decisions

The First Tier Tribunal held in February 2017 that the fact the grantor could choose to cash settle the relevant options did not prevent the special base cost rule from displacing the ‘market value’ rule (judgement here).  

On this basis, no allowable capital losses arose.This decision was appealed but, in April 2018, upheld by the Upper Tribunal (judgement here).


The Upper Tribunal’s decision confirms the previously understood CGT treatment of shares acquired on the exercise of non-tax advantaged share options.

This decision applies only to share based awards which are structured as formal ‘options’ (i.e. which must be exercised at the optionholders’ discretion), or which are treated as ‘options’ for CGT purposes because they are ‘employment-related securities options’ for income tax purposes.

In our view, share based awards which are not structured as formal options, and which are not ‘employment-related securities options’ for income tax purposes, for example Restricted Stock Unit (RSU) awards which HMRC accepts do not give the employee a ‘right to acquire securities’ as the grantor may settle in cash at its discretion (see here), should not be affected by this decision.  

The shares acquired pursuant to such RSU awards should, provided they are not convertible and not subject to any restrictions, continue to be treated as acquired at their market value for CGT purposes.

If you have any queries, please get in touch with your normal KPMG contact or e-mail us.  

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