Mansworth (Inspector of Taxes) v Jelley
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick,Lord Justice Jonathan Parker,Lord Justice Kennedy |
| Judgment Date | 12 December 2002 |
| Neutral Citation | [2002] EWCA Civ 1829 |
| Docket Number | Case No: 2002/0793 |
| Court | Court of Appeal (Civil Division) |
| Date | 12 December 2002 |
[2002] EWCA Civ 1829
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE LIGHTMAN)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Kennedy
Lord Justice Chadwick and
Lord Justice Jonathan Parker
Case No: 2002/0793
Mr T Brennan QC and Mr H McKay (instructed by the Solicitor of Inland Revenue for the Appellant)
Mr M Sherry and Miss L Rippon (instructed by Messrs B P Collins, Gerrards Cross for the Respondent)
This is an appeal from an order made on 20 March 2002 by Mr Justice Lightman on an appeal under section 56A of the Taxes Management Act 1970 from a decision of the Special Commissioners (Mr Theodore Wallace) dated 5 November 2001 allowing an appeal by the taxpayer, Mr Colin Jelley, from assessments to capital gains tax on the disposal of shares which he had acquired by the exercise of stock options granted to him by his employer, J P Morgan & Co Incorporated. The issue raised by the appeal is upon what basis the cost to the taxpayer of acquiring those shares is to be ascertained for the purposes of computing the gain on disposal.
The underlying facts
The underlying facts are set out in paragraphs 5 and 6 of the special commissioner's decision:
"5. The Appellant was non-resident in the eight fiscal years up to 1987/88. While abroad he worked for subsidiaries of J P Morgan & Co Inc and was granted options over shares in that company exercisable at specified prices, in effect at their market value on the New York Stock Exchange at the time of the grant.
6, The options in question were granted in 1983, 1984 and 1985. The 1983 option was for 3600 shares at [$20.244] 1 and that for 1984 was for 4000 shares at $17.938. Both were exercised in June 1989 at a combined cost of $144,630 and the shares were sold a week later for $313,500. The 1985 option (after a bonus adjustment) was for 4400 shares at $24.094. It was exercised in April 1991 and the shares were sold [on the same day] at a profit of $120,578."
It may be noted (i) that it has not been suggested that the scheme under which the options were granted in this case was an approved share option scheme within the meaning of section 185 of the Income and Corporation Taxes Act 1988 (first enacted as section 47 of the Finance Act 1980), (ii) that, but for the fact that the taxpayer was non-resident at the time that the options were granted, he would have been chargeable to income tax under schedule E on an amount equal to the amount of his gain computed in accordance with section 135(3) of the Taxes Act 1988—see sections 135(1) and 140(1)(a) of that Act (the provisions of which were formerly in sections 186(1) and (9) of the Income and Corporation Taxes Act 1970)—and (iii) that, if he had been chargeable to tax under section 135(1) of the Taxes Act 1988, an amount equal to the amount of the gain chargeable to tax under that section would have been brought into account as part of the acquisition cost for the purposes of the charge to capital gains tax—see section 32A of the Capital Gains Tax Act 1979 (now re-enacted as section 120 of the Taxation of Chargeable Gains Act 1992). The particular feature which gives rise to the issue raised by this appeal is the change from non-resident to resident status between the dates upon which the options were granted and the dates upon which they were exercised.
The assessments
The taxpayer was assessed to capital gains tax for the years ending 5 April 1990 and 5 April 1992 on the gains made on the disposals of the option shares. The relevant assessments are dated 9 March 1992 and 19 April 1996. The assessments were made under the provisions of the Capital Gains Tax Act 1979. The basis of the assessments, as the special commissioner pointed out, was that "the base value for capital gains tax purposes consisted of the sum of price paid for the shares on exercise of the options and the market value of the options when originally granted, which was treated as nil". This was said to be the basis required by section 137(3) of the 1979 Act when read in conjunction with section 29A(1) (now re-enacted as sections 144 (3) and 17(1) of the Taxation of Chargeable Gains Act 1992).
The two sections are in these terms (so far as material):
"137(3) The exercise of an option by the person for the time being entitled to exercise it shall not constitute the disposal of an asset by that person, but, if an option is exercised then the acquisition of the option (whether directly from the grantor or not) and the transaction entered into by the person exercising the option in exercise of his rights under the option shall be treated as a single transaction and accordingly—
(a) if the option binds the grantor to sell [a call option], the cost of acquiring the option shall be part of the cost of acquiring what is sold, and
(b) if the option binds the grantor to buy [a put option], the cost of the option shall be treated as a cost incidental to the disposal of what is bought by the grantor of the option."
"29A(1) Subject to the provisions of this Act, a person's acquisition or disposal of an asset shall for the purposes of this Act be deemed to be for a consideration equal to the market value of the asset—
(a) where he acquires or, as the case may be, disposes of the asset otherwise than by way of a bargain made at arm's length, …, or
(b) where he acquires or, as the case may be, disposes of the asset wholly or partly for a consideration that cannot be valued, or in connection with his own or another's loss of office or employment or diminution of emoluments, or otherwise in consideration for or recognition of his or another's services or past services in any office or employment or of any other service rendered or to be rendered by him or another."
On the basis that the options had been acquired (as the special commissioner found) "otherwise than by way of bargain made at arm's length" or (as the judge was later to describe as common ground) "by reason of [the taxpayer's] employment", the revenue took the view that section 29A(1) of the 1979 Act required the cost of acquiring the options to be deemed—for the purposes (inter alia) of section 137(3)(a) of that Act—to be equal to the market value of the options at the time of acquisition; and (if that market value were to be taken as nil) the cost of acquiring the shares on the exercise of the option was—and could only be—the price payable under the option.
The taxpayer's appeal to the special commissioner
The taxpayer challenged the assessments on the basis that the revenue's approach failed to give proper effect to the requirement, imposed by section 137(3) of the 1979 Act, that "the acquisition of the option … and the transaction entered into by the person exercising the option in the exercise of his rights under the option shall be treated as a single transaction". It was said that the "single transaction" was the acquisition of the option shares by the acquisition and exercise of the rights under the option. Once the option had been exercised, the effect of section 137(3) of the 1979 Act was that the only "asset" acquired, for the purpose of capital gains tax, was the option shares. The option itself could no longer be treated as being a separate asset. In particular, the option itself had to be treated as if it were not an asset capable of being acquired or disposed of for the purpose of the charge to tax; and so not an asset in relation to the acquisition or disposal of which section 29A(1) of the 1979 Act could have any application. The only asset to which section 29A(1) was capable of having any application was the option shares.
In those circumstances, it was said, the only relevant question was whether or not—treating the acquisition of the option shares by the acquisition and exercise of the option as a single transaction (as section 137(3) of the Act required)—the acquisition of those shares was "otherwise than by way of bargain made at arm's length" or "otherwise in consideration for or recognition of his … services … in any employment". Given that the answer to that question was plainly "yes", section 29A(1) of the 1979 Act required that the option shares be treated as acquired for their market value.
If the true effect of sections 137(3) and 29A(1) of the 1979 Act, read together, is that the option shares must be treated as acquired for their market value, then it has not been in dispute that the time at which market value is to be ascertained is the time at which that acquisition was made. Nor has it been in dispute that the time at which that acquisition was made was the time when the option was exercised. That was the effect of section 27(2) of the 1979 Act (now section 28(2) of the 1992 Act). In the circumstances that the taxpayer disposed of the option shares on the same day as he acquired them—or, in the case of the 1989 acquisition, within a few days of acquiring them—there was no gain upon which he could be assessed to tax.
The special commissioner reminded himself that the amount of the gains accruing on a disposal of assets fell to be computed in accordance with Chapter II of the 1979 Act, of which section 29A forms part. Section 32(1) of the Act required that, except as otherwise expressly provided, the sums allowable as a deduction in the computation of the gain accruing to a person on the disposal of an asset should be restricted to (a) the amount or value of the consideration, in money or money's worth, given by him or on his behalf wholly and exclusively for the acquisition of the assets, together with...
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