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Terms of options

It is clear from the tax case law on tax advantaged employee share schemes that:

• to determine whether an option gives its holder legally enforceable “rights to acquire sharesâ€�, it is necessary to consider closely its precise terms at the time the option is granted, (CIR v Burton Group plc) (ETASSUM47250),
• to determine exactly what rights it gives its holder, and when those rights were obtained by the option-holder, it is necessary to consider closely, at any given time, the precise terms of a share option, (CIR v Eurocopy plc (ETASSUM47260) and CIR v Reed International plc) (ETASSUM47270).

Scheme organisers will need to ensure that for a scheme to meet the requirement of providing participants with legally enforceable “rights to acquire shares� it must provide for the key terms of the option to be clearly stated at the time it is granted (see below).

The key terms of an option are:

• the asset under option which the option-holder has a right to acquire (in the case of a share option this will be reflected by a specified number of shares of a specified class),
• the price at which the option can be exercised, and
• the time when the option is exercisable.

Whether the terms of options are sufficiently clearly stated must be considered in the light of the decision in CIR v Burton Group plc (63 TC 191). Further guidance on this case is at ETASSUM47250.