STSM113020 - Derivatives: options - stamp implications: secondary trading of an Option
Stamp Duty
Where, the rights to and under an equity option contract are transferred and purchased before expiry no Stamp Duty charge will normally arise.
This is because no instrument or document of transfer will be required to be completed and executed under which the rights to the option, are acquired by the purchaser.
Stamp Duty Reserve Tax (SDRT)
The transfer of:
- rights to and under an equity option contract underlying UK registered stocks and shares;
- before the exercise or expiry of the contract;
- to another person for consideration in money or money’s worth;
is within the scope of a SDRT charge under section 87 Finance Act 1986.
The reason for the charge is that as a right has been transferred which gives the purchaser an ‘option to acquire’ UK registered securities. This represents a SDRT ‘chargeable security’ as defined at section 99(3) (c) Finance Act 1986.
However the secondary or onward trading to new purchasers of many equity options may not, be subject to SDRT in the following scenarios:
Cash Settlement Only
Where the terms of the equity option contract only provide for cash settlement upon option exercise there will be no physical delivery of the underlying securities. See STSM112060 for further information on cash settlement.
Cash or Securities Settlement
Similarly, no SDRT charge arises where under the equity option contract term the issuer has the right to decide whether to settle in cash or via physical delivery of securities upon any subsequent exercise of the option.