Kirby v Thorn EMI [1987] STC 621 (CA)

Facts

• Thorn EMI held shares in its subsidiary, EMI Music Publishing.
• Rather than selling the shares directly, Thorn EMI granted share options to purchase these shares.
• The central issue concerned whether proceeds from these options constituted a sale for capital gains tax purposes and how the taxable profit should be calculated.
• The dispute focused specifically on whether costs associated with the options could be deducted from the gain, or only costs incurred when purchasing the original shares.

Issues

1. Does granting options to purchase shares constitute a sale or disposal of the shares for capital gains tax purposes?
2. What costs are deductible in calculating the taxable gain arising from the partial sale via share options?
3. Do proceeds from granting options, in the absence of a direct sale, trigger capital gains tax liability?

Decision

• The Court of Appeal held that granting share options amounted to a partial sale of Thorn EMI’s shares, as it involved the disposal of some rights attached to ownership.
• The Court confirmed that a “sale” for capital gains tax includes giving options that reduce or alter ownership rights, not only outright, direct sales.
• Only costs directly tied to the original acquisition of the shares are deductible in computing the gain; costs associated with issuing the options are not deductible.

Legal Principles

• Granting share options can constitute a partial sale for capital gains tax when the grant results in the reduction of ownership rights.
• For partial disposals, the deductible costs in capital gains calculations are limited to those incurred in acquiring the original asset, not costs related solely to the disposal mechanism (such as setting up or granting options).
• Proceeds from granting options are treated as consideration for a part disposal and are thus subject to capital gains tax.

Conclusion

The Court of Appeal in Kirby v Thorn EMI established that issuing share options qualifies as a partial sale for capital gains tax, and clarified that only the original acquisition costs of the asset are deductible when computing taxable gains from such partial disposals. This decision provides clear rules for determining taxable gains in similar share sale and option scenarios.