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Abbott v Philbin (H M Inspector of Taxes)
Factual and Procedural Background
In October 1954, Company A offered selected executives, including the Appellant (its secretary), non-transferable options to purchase ordinary shares at the then-current market price of 68s 6d. The Appellant paid £20 for an option over 2,000 shares. On 28 March 1956, while still employed, he exercised part of that option and acquired 250 shares for £856 5s at a time when their market value was £1,025. The Respondent (the taxing authority) included the £166 difference as an emolument in the Appellant’s Schedule E assessment for 1955-56.
The Special Commissioners upheld the assessment, considering themselves bound by Forbes’s Executors v. Commissioners of Inland Revenue. Judge Roxburgh reversed them, but the Court of Appeal reinstated the assessment. The Appellant obtained leave, and the House of Lords heard the further appeal in May 1960, delivering judgment in June 1960.
Legal Issues Presented
- Whether the grant of a share-option to an employee constitutes a “perquisite or profit” assessable under Schedule E in the year of grant.
- If not, whether the financial advantage realised when the option is later exercised (difference between option price and market value) is a taxable perquisite for the year of exercise.
- Whether a non-transferable option can nonetheless be “turned to pecuniary account” within the meaning of Tennant v Smith.
Arguments of the Parties
Appellant's Arguments
- The option itself, acquired for £20, vested a property right capable of valuation; any taxable benefit therefore arose in 1954-55, not 1955-56.
- The subsequent rise in share value was merely an appreciation of property already owned and fell outside Schedule E.
- Even if the option had no immediate market, it was still a chose-in-action capable of assignment in equity or of realisation through back-to-back transactions.
- Forbes’s Executors was wrongly decided and should not bind the House.
Respondent's Arguments
- The option was personal and non-transferable; until exercised it had no marketable value and could not be “turned to pecuniary account.”
- Taxable benefit therefore accrued only when the Appellant acquired the under-priced shares in 1955-56.
- The case fell within the principle of Forbes’s Executors, which the lower tribunals were right to follow.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Tennant v. Smith | Tax applies only to money or to benefits capable of being “turned to pecuniary account.” | Guided analysis of whether the option itself constituted a taxable perquisite. |
| Forbes’s Executors v. Commissioners of Inland Revenue | Non-transferable share options are not taxable until exercised. | Special Commissioners and Court of Appeal followed it; House of Lords majority over-ruled it. |
| Weight v. Salmon | Profit arises when under-priced shares are allotted, not when offer is made. | Used by Respondent as analogy; distinguished by majority as involving mere offer, not binding option. |
| Bridges v. Bearsley | Timing of taxation where shares are transferred as remuneration. | Considered but treated as fact-specific and not determinative. |
| Tait v. Smith | Valuation of deferred benefits. | Referenced in discussion on valuation difficulties; no direct reliance. |
| Ede v. Wilson | Share privilege as money’s worth despite resale restrictions. | Cited by first-instance judge to illustrate valuation principles. |
Court's Reasoning and Analysis
Majority (Viscount Simonds, Lords Reid & Radcliffe): The option, though non-transferable, was itself a valuable right. It enabled the holder, at any chosen time within ten years, to obtain freely marketable shares below market price and could be monetised via immediate sale of those shares or by pre-arranged transactions. Accordingly it was a perquisite in 1954-55. Once that perquisite had been taxed (or was taxable) no further Schedule E charge could arise when the option was later exercised; the realised gain was a capital appreciation of property already owned. The majority rejected the reliance on Forbes’s Executors, holding it wrong in principle and over-ruling it.
Dissent (Lord Keith of Avonholm, Lord Denning): The option was merely a standing personal offer—or machinery—for creating a benefit. No profit arose until the offer was accepted and shares were issued. The benefit therefore accrued, and was properly taxed, in 1955-56. They would have upheld Forbes’s Executors.
Holding and Implications
Majority Holding – Appeal Allowed. The £166 included in the Appellant’s 1955-56 assessment was not a taxable perquisite. The option itself, acquired in 1954-55, was the taxable benefit; any later uplift in share value represented capital appreciation, not income.
Implications: The decision overturns Forbes’s Executors, clarifying that the grant of an employee share option is, in principle, the taxable event if the option has determinable value, even if it is non-transferable. Subsequent gains on exercise are capital and fall outside Schedule E. Employers and tax authorities must therefore focus on valuation of options at grant, not on profits realised upon exercise.
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