UKFTT 163 (2009) Smith v HMRC

Shares sold at above MV - employment benefit - HMRC won

Case Summary:

Mr Smith exercised options over shares in his employer Sensormatic, which was taken over by Tyco. The market price of the shares acquired by him was $3,233,250. The price paid for the shares on the exercise of the options was $1,556,800 and so he made a gain on the exercise of the options of $1,676,450. That gain was taxed under section 135 ICTA 1988 (now s477 et seq ITEPA 2003).

Sensormatic had agreed that if there were to be a change in control of Sensormatic, Mr Smith would have the right to sell any Sensormatic shares he held to Sensormatic at the price paid on the change in control. He began employment with Tyco and, on the share for share exchange, exchanged all his Sensormatic shares for shares in Tyco which were then valued at $47.245 each. In June 2002, when the price of Tyco shares was $17.269 each, the Appellant exercised his right under the change in control agreement and Tyco bought his Tyco shares at the price paid on the change in control, ie $47.245.  Mr Smith thus disposed of his Tyco shares to his employer at a price which exceeded market value at the date of the disposal and the amount of the excess was £1,533,391.

It was held this was taxable under S154 ICTA 1988 (now S201 and 203 ITEPA 2003) as the Tyco gain was a benefit provided for him by reason of his employment.

Mr Smith had paid $1,556,800 for his shares and he eventually got cash for them of  $  3,526,792.01 . So the gain for Mr Smith on his shareholding was  $ 1,969,992.01. Yet he paid tax on the option gain of $1,676,450 and following the FTT decision more tax on the S154 gain is due giving a total amount charged to tax of  $ 3,914,128.42.  Mr Smith was charged to tax on $2m in excess of his actual gain.

This seems an unfortunate outcome but the Tribunal judge does not allude to this result of her decision and focuses on the detail of the legislation.