The UT upheld the FTT decision in Stephen Davies v HMRC [2018] UKUT 130 (TCC) and denied Mr Davies' claim for a capital loss arising from exercise of a share option.

Mr Davies' employer had discretion under the terms of employee share options granted to Mr Davies to satisfy the options, once exercised, either by the delivery of shares or in cash. Mr Davies filed his tax return on the basis that the exercise of the options generated a capital loss, which he sought to offset against other capital gains he had realised.

Mr. Davies argued that, because the employer was not "bound" to sell (issue) the shares and could instead pay cash, the provisions of section 144ZA TCGA 1992 were not engaged. If that was right, the market value acquisition rule in section 144ZA would have applied and the transaction could have generated a capital loss.

The UT held, however, that section 144ZA TCGA would still apply even where the grantor had a measure of discretion as to the manner in which the grantee's rights were to be satisfied. This is perhaps not surprising given that section 144ZA is an anti-avoidance provision introduced, in parts, to prevent the generation of capital losses on the acquisition of shares under options.