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UT (Tax & Chancery) UT-2024-000088 - [2025] UKUT 00374 (TCC)
Fecha: 15-Oct-2025
The decision in Abbott
The decision in Abbott
In Abbott v Philbin the appellant was the secretary of a company. At its AGM, the company resolved to grant the directors options to acquire shares on such terms as the directors thought proper. On 6th October 1954, the directors were offered the opportunity to purchase an option to acquire shares at the mid-market price at the date of offer (68s 6d). The purchase price was £1 for every 100 shares. As there was some uncertainty before the FTT as to the terms of the option (Decision, [49]) we have checked them from the House of Lords case papers filed in the appeal. The option agreement provided:
“You will note that the option is not transferable and to the extent not previously exercised will expire on your death or retirement, upon your Service with the Company and/or its subsidiaries ending, or on the tenth anniversary of the date of grant of the Option, whichever first occurs.”
The option, therefore, had to be both acquired and exercised while the option-holder was still an employee. It is also apparent from those papers that when the ability to purchase the option was made known to the directors, they were told “that [tax] counsel had advised that they would be taxed on the value option rights at the date of acquisition, which value was generally estimated at nil, but not on any amount by which the share value at date of exercise exceeded the strike price.”
On 7th October 1954, Mr Abbott wrote accepting the offer to purchase an option to acquire 2,000 shares for £20. On 28 March 1956, he exercised an option to acquire 250 shares (when the market price was 82s).
The issue arose as to whether the profit made on that exercise fell within rule 1 of Schedule E to the Ninth Schedule to the Income Tax 1952 which taxed “all salaries, fees, wages, perquisites or profits whatsoever” from “an office or employment.” The taxpayer argued that the relevant remuneration was the value of the option when granted. No one argued that the receipt of the Company’s offer of 6th October was itself a taxable remuneration, and Lord Denning’s judgment explains that such argument would have failed on the basis that the offer was capable of being revoked and was a mere expectation (p.383-84). However, we do not think we can exclude the possibility that someone might have been willing to pay Mr Abbott for the right to decide (a) when he should accept the offer while it remained open and (b) how many options should be exercised. If so, this illustrates the fact that an employee may have something capable of monetarisation, without being in receipt of a legal right of a kind capable of amounting to remuneration.
The majority of the House of Lords held that the relevant taxable remuneration was the value of the option at the date of acquisition, not the profit made on its realisation (it followed that the advice originally given by counsel was correct). It is important to note what each of the three judges making up the majority decided.
Viscount Simonds at p.366 identified the first issue in the case as being whether the grant of the option was “itself a perquisite or profit of the year 1954-55”, saying “it would not, as I understand the argument of counsel for the Crown, be contended that, if the grant of the option was itself a perquisite or profit arising from the office, the subsequent exercise of it would be another perquisite or profit.” He held as follows:
When he acquired the option, the appellant acquired something of “potential value”, it not mattering for this purpose “whether it falls into the category of proprietary or contractual right, or into some dim twilight that divides those juristic conceptions”.
The words “perquisite or profit whatsoever” were “as wide and general as they well could be”, meaning (quoting from Tennant) “something acquired which the acquirer becomes possessed of and can dispose of to his advantage, in other words money, or that which can be turned into pecuniary account.”
It did not matter that the option was not transferable, because the grantee could agree with a third party to exercise the option and transfer the shares to him (in modern parlance, the equivalent of a transfer could be “synthesised” by an appropriate transaction).
The test was “whether it is something which is by its nature capable of being turned into money”, and it was irrelevant whether or not it could be valued: “If it had no ascertainable value then it was a perquisite of no value.”
He pointed to the difficulty of contending that an option given to an employee to acquire shares at a price lower than the prevailing market price was “not a perquisite which falls within the Schedule.”
As there could not be one perquisite at the date of the grant and a second perquisite when the shares were taken up, the Crown's case failed.
Independently of that, the taxable perquisite must be something arising "therefrom," i.e. (from the office, in the year of assessment) and he “did not find it easy to see that the increased difference between the option price and the market price in 1956 or, it might be, in 1964 in any sense arises from the office”, as this difference would be “due to numerous factors which have no relation to the office of the employee, or to his employment in it”. He rejected the claim of the Crown on that basis as well. It will be noted that this particular basis echoed the second distinction to which we referred at [20(2)] above.
Turning to Lord Reid:
At p.370, he noted that “the company retained no control over the times at which or the extent to which he might exercise his option”. Although the significance of that comment was not explained; it reflects the feature of Abbott that the employer’s role was, in any direct sense, completed when the option agreement was concluded (albeit we accept that one factor influencing the prevailing market price would be the performance of the company, into which the employer’s own effort, as well as general economic conditions and the performance of rival companies would all play a part).
He also suggested that it made no difference to the issue before the court that the terms of the option required the appellant to remain in the service of the company.
He held that “the question is whether this option was a right of a kind which could be turned to pecuniary account”, continuing “the test must be the nature of the right and not whether this particular option could readily have been turned to pecuniary account in October, 1954”. That comment, and other references to “the nature of the right”, formed the basis of a submission by Ms Hicks, which appears to have gained traction with the FTT, that the House of Lords were recognising that different rights might admit of different answers to the “what was the remuneration received” question. Mr Firth submitted that this was simply a reference to the Tennant requirement (discussed in the preceding paragraph) that the right in issue could be turned into pecuniary account”. However, the passage in issue distinguished between “the nature of the right and “whether this particular option could readily have been turned to pecuniary account”, describing the latter as a question of fact on which there was no finding. Doing the best we can, we think Lord Reid was saying that the decision of the House turned on a prior analysis of the nature of the right (an option to receive shares) without reference to any particular factual issues as to the practicalities of converting this right into cash. That is reinforced by the statement at p.372 that “the argument for the Crown was not based on any special difficulty in turning the particular option to pecuniary account. It was based on the nature of the right: it was said that a right of option does not have the necessary qualities to make it a perquisite.”
Like Viscount Simonds, Lord Reid did not regard the non-transferability of the option as a determining factor, there being other ways of “turning such a right to pecuniary account.” He too gave the example of an option which was “in the money” at the time of grant.
At pp.372-3, he referred to the further difficulty of relating the proceeds to a particular year of assessment as Rule 1 required, and the comparative ease with which the grant of an option be so linked, although he did not express a concluded view on this point.
At p.375, he discussed the relevance of the conditional nature of the right, observing “if the condition is one with which the taxpayer can easily and immediately comply, it does not, in my opinion, form an obstacle to turning the option to pecuniary account” but “[i]f the condition is one which cannot immediately be complied with that may make a difference” (giving the example of where the perquisite had yet to be earned). He stated that “conditions and restrictions attached to or inherent in an option may affect its value, but are only relevant to the question whether the option is a perquisite if they would in law or in practice effectively prevent the holder of the option from doing anything when he gets it which would turn it to pecuniary account.”
Lord Radcliffe referred to the conflicting arguments as to when a perquisite was received, and the Revenue’s argument of “persuasive force” that it was not when the option was granted (p.376):
At p.377, he noted that “it is a natural enough assumption for the tax gatherer that if a transaction does not attract tax in one year it must in another” but that he did not “regard that as a good general principle upon which to found the construction of the income tax code”, referring to the possibility that neither the option (particularly one which was not assignable) nor the proceeds of the realisation fell within Rule 1. However, he was persuaded that the taxable receipt was the granting of the option and the amount of that receipt was the value of the option at the time it was received.
He accepted that “a line has to be drawn somewhere between convertible and non-convertible benefits”, but that the option in that case was on the taxable benefits side of the line, being “analogous for this purpose to any other benefit in the form of land, objects of value or legal rights.”
He would have rejected the Revenue’s claim on another ground, namely that the 1956 profit did not arise from the office, but was “an advantage which accrued to the appellant as the holder of a legal right which he had obtained in an earlier year, and which he exercised as option holder against the company.” He concluded that “it would be quite wrong to tax whatever advantages the option holder may obtain through the judicious exercise of his option rights in this way as if they were profits or perquisites from his office arising in the year when he calls the shares.”
There is a powerful dissenting judgment from Lord Denning, but we will not lengthen this decision by summarising it. The ratio of the majority is binding upon us. What is that ratio? Arnold LJ addressed that question in Charman v Revenue and Customs Commissioners [2021] EWCA Civ 1804, [22]:
“Two points were made by the majority of the House of Lords in Abbott v Philbin [1961] AC 352, both of which were subsequently reversed by statute. The first point, and the ratio decidendi of the case, is the one referred to by Lord Walker JSC in Gray’s Timber and by Lord Reed JSC in UBS concerning the time at which the option became taxable … The second point, which was obiter, was that the difference between the price of the shares under the option and their market value when the option was exercised did not arise “from” the taxpayer's employment.”
We gratefully adopt that analysis, but add that the more the realisation of the profit from the options turns on the judgment of the employee, the stronger the case for treating the option itself as remuneration provided by the employer (and vice versa).
We also note the following features of Abbott v Philbin:
The right in question – the option to acquire shares in a listed company at a favourable strike price – is a well-recognised asset class, one commonly traded and which very often functions as a proxy to the economic benefits of share ownership (cf. the example at [21] above).
The House of Lords was not asked to consider any particular difficulty in turning the option into account. The process of realisation was not regarded as presenting any obvious challenge by either Viscount Simonds (pp.365-66: “there could be no difficulty”), Lord Reid (p.371: “nothing to indicate that there would have been much difficulty”) or Lord Radcliffe (p.378:”he could also at any time, at his choice, sell or raise money on his right to call for the shares”).
Indeed if the option was “in the money” so far as the employee was concerned when granted (a possibility to which both Lord Reid and Viscount Simonds referred), it represented an immediate conferral of benefit which the employee could have realised by exercising it on the day of grant.
Once granted, it was for the employee to decide when to exercise it, and take the risk that waiting for a sufficient increase above the strike price might miss the market peak and/or render the option valueless (cf Lord Racfliffe’s reference to the employee’s “judicious assessment”).
Once the employee had been granted the option, the employer had no direct influence over how profitable it would be, save that the better run the company was in general terms (and all other things being equal), the greater the likelihood of appreciation in the share price (cf. Lord Reid at p.370).
Mr Abbott had to be an employee both to acquire and to exercise the option. However, this was broadly within his control, as Lord Reid noted at p.375 (and he appeared to leave open the possibility that conditions with which the employee could not easily and immediately comply may “make a difference”). In any event, should Mr Abbott have decided to retire or leave, he was able to exercise the option immediately prior to departure. It may be that market conditions would not have made that advantageous, or even positively harmful, but that is a matter going to the decision to exercise the right rather than an intrinsic limitation on the right.
There was, independently, a (comparatively generous) 10-year time limit for exercising the option.
Lord Radcliffe said that the case involved line-drawing, with this issue being on the right side of the line.