Base cost of shares from employee share schemes

The capital gains base cost of shares received through employment is what you paid, plus any amount that was taxed as employment income on the shares, so the same value is not taxed twice. Section 119A TCGA 1992 adds income charged on exercising an option, on restricted shares and on similar events, while shares from a Share Incentive Plan take their market value when they leave the plan. On a sale, plan shares are a separate class, and EMI shares that can qualify for Business Asset Disposal Relief are kept out of the section 104 pool and matched before it, earliest first.

What is the starting point for the base cost?

HMRC’s Capital Gains Manual at CG56321 explains that where shares are acquired by reason of employment, the market value rule in section 17(1) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) applies unless other legislation displaces it. The reasoning is that the employee’s services make up the difference between what they paid and the value received. Three provisions displace the rule:

Section 149AA stops market value applying to restricted or convertible employment related securities acquired on or after 1 September 2003, so the cost is the amount actually paid, plus any additions under section 119A.
Section 149A limits the cost of an employee share option granted after 27 November 1995 to the amount actually paid for the grant, usually nothing.
Section 144ZA stops market value displacing the price paid when an option is exercised after 9 April 2003.

The income tax framework behind these rules is summarised in employment related securities basics.

How are amounts taxed as income added to the cost?

Section 119A(2) treats the relevant amount as if it formed part of the consideration given for the shares, deductible under section 38(1)(a). Section 119A(3) lists the income tax charges that count, including amounts counting as employment income under:

section 426 ITEPA 2003 (chargeable events on restricted securities);
section 438 ITEPA 2003 on the conversion of convertible securities;
section 446U ITEPA 2003 (discharge of a notional loan on shares acquired for less than market value);
section 447 ITEPA 2003 where the benefit is an increase in the market value of the securities; and
section 476 ITEPA 2003 on the exercise of an employment related securities option.

Under section 119A(5)(b) relief for employer’s National Insurance met by the employee is ignored, so CG56384 confirms the full section 476 amount is added even where the employee bore the employer’s contributions.

One charge is not added. CG56337 explains that where ordinary shares are acquired below market value and taxed under section 62 ITEPA 2003, the market value rule has already given full credit. HMRC’s example is an employee paying £2,000 for shares worth £2,500: the £500 is taxed as earnings, the capital gains cost is £2,500 under section 17, and adding the £500 again would double count.

What about restricted shares?

For restricted securities acquired on or after 1 September 2003, CG56339 builds the cost from three parts: the actual cost, any amount that was earnings under section 62 ITEPA 2003 on acquisition, and amounts counting as income under Chapter 2 of Part 7 ITEPA 2003 on or before the disposal. If employer and employee make an election under section 431 ITEPA 2003 to ignore the restrictions, income tax is paid on the unrestricted value at the start, and later growth falls into the capital gain rather than being charged as income.

How is the cost worked out for share options?

CG56384 sets the cost of shares acquired on exercising an option after 9 April 2003 as:

the amount paid for the option, if anything;
the exercise price paid for the shares; and
any amount counting as income on exercise under section 476 ITEPA 2003.

For an unapproved option the third item is usually the spread between market value and exercise price, so the base cost is broadly market value at exercise. For a qualifying EMI option exercised where section 529 ITEPA 2003 applies, CG56442 explains there is no section 476 charge, so the cost is simply the amounts paid for the option and the shares. Where a disqualifying event or a discounted exercise price produces a limited charge, CG56449 shows that charge being added under section 119A. CSOP and SAYE shares acquired without an income tax charge likewise have a cost equal to the price paid.

What is the base cost of SIP shares?

CG56495 explains that the employee is absolutely entitled to free, partnership, matching and dividend shares from the date they are awarded or acquired. When shares cease to be subject to the plan, paragraph 5 of Schedule 7D TCGA 1992 treats them as disposed of and immediately reacquired at market value, and that disposal is not a chargeable gain. So:

if shares are sold while still in the plan, there is no capital gains tax; and
if shares are taken out and kept, their cost is their market value on the day they left the plan, not the partnership share price or nil.

Shares leave the plan when the employee withdraws them or tells the trustees to sell, when the employee leaves relevant employment, and when trustees sell shares to meet PAYE. The income tax side is covered in Share Incentive Plans.

How are scheme shares matched on a sale?

The normal order is same day acquisitions, then acquisitions in the next 30 days, then the section 104 pool, as explained in share matching rules. Employee schemes change this in three ways.

SIP plan shares

Paragraph 4 of Schedule 7D treats a participant’s plan shares, while they are subject to the plan, as a different class from shares that are not plan shares. CG56495 confirms that selling shares held outside the plan is never matched with plan shares.

EMI shares that can qualify for Business Asset Disposal Relief

Shares from a qualifying EMI option that meet section 169I(7C) to (7G) are “relevant EMI shares”. Section 105(5) treats them, on any day, as acquired separately from other shares bought that day and as disposed of after them. The 30 day rule in section 106A(5)(aa) matches with other shares before relevant EMI shares. After that, section 106A(6A) identifies disposals with relevant EMI shares rather than other shares, earlier acquisitions first, and section 106A(6B) keeps them out of the section 104 holding. So an employee who holds EMI shares and pooled shares will normally sell the EMI shares first. CG64052 explains that EMI shares can qualify for the relief without the 5% personal company test if the option was granted at least two years before the disposal, and GOV.UK gives the rate as 18% from 6 April 2026; see Business Asset Disposal Relief.

The same day election

Where approved scheme shares are acquired on the same day as other shares, sections 105A and 105B let an individual elect for the approved scheme shares to be treated as a separate acquisition and disposed of after the others (CG56460). CG56463 explains that CSOP and SAYE shares count only if no income tax charge arose on exercise. CG56462 sets the deadline at one year and 10 months after the end of the tax year of the first disposal.

How does this look in practice?

Illustration only. On the same day Priya exercises an unapproved option over 1,000 shares at £2 and a qualifying EMI option over 1,000 shares at £2, when the shares are worth £10. The EMI option was granted three years earlier.

Unapproved shares: cost £2,000 plus £8,000 charged under section 476, total £10,000.
EMI shares: no section 476 charge, cost £2,000.

She sells 1,000 shares the same day at £10 to cover the income tax. Under section 105(5), as long as the EMI shares are relevant EMI shares, the sale is matched with the unapproved shares first: proceeds £10,000, cost £10,000, no gain. Without that rule an average cost of £6,000 would give a £4,000 gain. When she later sells the EMI shares at £15, the gain is £13,000, which can qualify for Business Asset Disposal Relief.

What mistakes come up most often?

Leaving out the section 476 amount, so the same value is taxed as income and as a gain.
Adding a section 62 charge on unrestricted shares that already have a market value cost.
Using the purchase price for SIP shares instead of market value when they left the plan.
Putting EMI shares into the section 104 pool.
Missing the deadline for a section 105A election.
Not keeping P60s, P11D details and exercise notices that prove the amounts taxed as income.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.