540 Options and forfeited deposits

Summary

An option is specifically included as an asset for capital gains tax purposes – see section 532(a). Section 540 sets out a number of detailed rules for the treatment of options, including double options and option payments, whether options to buy or sell or to enter into any transaction which is not a sale (for example, the grant of a lease).

An option is treated as a separate chargeable asset in the hands of the grantor but not in the hands of the person to whom it is granted. If an option is not exercised, the grantor is not put to any expense and the consideration the grantor received for giving the option is a gain. The abandonment of an option by the person (the grantee) entitled to exercise it is treated as a disposal by the grantee of an asset, namely, the option. With 3 exceptions, the abandonment of an option cannot give rise to an allowable loss by the grantee. The exceptions are – a quoted option (one quoted and dealt in on a stock exchange in the same manner as shares) to subscribe for shares in a company, a traded option (one which is quoted on a stock exchange or a futures exchange) and an option to acquire assets exercisable by a person intending to use the assets, if acquired, in the person’s trade. The abandonment of an option in these 3 cases gives the grantee the right to claim an allowable loss equal to the amount of the allowable expenditure on the option.

Where an option is exercised, the option and its exercise merge into a single transaction. If it is an option binding the grantor to sell, the option consideration is treated as part of the sale consideration in the hands of the grantor, while for the grantee the cost of the option is treated as part of the cost of the acquisition of the asset. If the option binds the grantor to buy, the grantor must deduct the option consideration from the cost of acquisition while the grantee is allowed to deduct the cost of the option as an incidental cost of the disposal of the asset to the grantor.

In the case of a double option where the grantor is bound both to sell and to buy, the option consideration is divided equally and the rules in the section apply as if there were 2 separate options.

Details

Definitions

(1) “quoted option” is an option which at the time of abandonment or other disposal is quoted on any stock exchange in the same manner as shares.

“traded option” is an option which at the time of abandonment or other disposal is quoted on any stock exchange or futures exchange.

References to an option include references to an option binding the grantor to grant a lease for a premium or to enter into any other transaction which is not a sale, and references to buying and selling in pursuance of an option are to be construed accordingly.

Grant of option is generally a disposal

(2) The grant of an option is a disposal of an asset even where the grantor does not own the asset which the grantor binds himself to sell or, because the option is abandoned, never has occasion to own. Similarly, where the grantor binds himself to buy, the granting of such an option is a disposal of an asset even though the grantor never acquires the asset because the option is abandoned.

Merging of transactions where option is exercised

(3) However, where an option is exercised, then, in so far as the grantor is concerned, the sale or purchase, as the case may be, is treated as one transaction with the option itself. Thus, the option consideration is added to the main consideration in computing a gain or loss on the sale or, if it is a purchase, deducted from the cost of acquisition.

(4) The exercise of an option is not treated as a disposal by the person entitled to exercise it. If the option is exercised, it is treated as a single transaction with the acquisition or sale of the asset. Thus, where the grantor is bound to sell, the option consideration is added to the grantee’s cost of acquiring the asset and, where the grantor is bound to buy, the option consideration is treated as an incidental cost to the grantee of the sale of the asset.

Abandonment of options – general

(5)(a) The abandonment of an option by the person entitled to exercise it constitutes the disposal of an asset (the option) by that person.

(5)(b) The abandonment of an option by the person entitled to exercise it cannot generally give rise to an allowable loss for capital gains tax purposes. This general rule does not apply in the case of certain options covered by subsections (7) and (8)(a).

Certain options treated as wasting assets

(6) Certain options are treated as wasting assets and the period over which wastage takes place is treated as running to the date the right to exercise the option ends or the date the option becomes valueless, whichever is the earlier. This rule applies in relation to the disposal by means of transfer of an option binding the grantor to sell or buy shares which have a quoted market value on a stock exchange. Accordingly, on any disposal of such an option its base cost is written down on a uniform basis. Thus, if an option cost €600 and has 6 months to run, one-sixth is written off each month to bring its value steadily down from the initial €600 to nil at the end of the 6 months. The value of the option may be reduced to nil earlier than the end of the 6 months if at any time the option becomes valueless (for example, because of a change in market prices).

Options to acquire business assets, quoted options and traded options

(7) Special treatment applies to the exercise or abandonment of an option to acquire assets for the purpose of a business. If such an option is abandoned, the normal rule (subsection (5)(b)) that abandonment of an option cannot give rise to an allowable loss is disapplied. Also, whether the option is abandoned or exercised, the normal wasting assets rule provided by section 560(3) does not apply. This special treatment applies where a person is already carrying on a business and intends to use the assets subject to the option in that business and also where a person intends to use those assets in a business which the person proposes to set up. In the latter case the business must be set up within 2 years of acquiring the option.

(8)(a) Similar special treatment also applies to the exercise or abandonment of a quoted option to subscribe for shares in a company or of a traded option. Thus, if such an option is abandoned, the normal rule (subsection (5)(b)) that abandonment of an option cannot give rise to an allowable loss is disapplied. Also, whether the option is abandoned or exercised, the wasting asset treatment set out in subsection (6) and in section 560(3) does not apply.

(8)(b) There is a further special rule to deal with the case where a quoted option to subscribe for shares in a company is dealt in within 3 months of a reorganisation or reduction of share capital, the conversion of securities, a company amalgamation by exchange of shares or a company reconstruction or amalgamation to which section 584, 585, 586 or 587 applies. In such a case the option is treated in exactly the same way as the shares which could be acquired by the exercise of the option, and the market value rules for determining the value of quoted shares (section 584(3)) apply for determining the market value of the option.

Double options

(9) A double option (binding the grantor to both buy and sell) is treated as 2 options with half the consideration being attributed to each option.

Forfeited deposits

(10) The same treatment as is applied to options also applies to forfeited deposits or other transactions which are abandoned.

Relevant Date: Finance Act 2021