How unapproved share options are taxed

Unapproved share option plans can be used by employers to reward those who help grow the business (including those not eligible for HMRC-approved options like the Enterprise Management Incentive Scheme). Here we explain their tax implications.

With unapproved share options, individuals are given the option to acquire shares in the business at a future date at a price specified by the company – usually the market value of the shares on the date the option is granted.

An important advantage of unapproved plans, however, is that employers have discretion to tailor qualifying conditions for share recipients, such as meeting various performance targets.

Income and corporation tax

Recipients of shares pay income tax only when they exercise their option. This is based on the difference between the market value of the shares at that date, and the price paid for them.

At the same time, the company will get a corporation tax deduction for the difference between the market value of the shares at that time less the amount paid by the individual for the shares.

Unless there is a ready market or buyer for the shares, there should be no national insurance contributions due.

Exercising the option

If the share value at the point of exercising the option is lower than the agreed price, then the individual may choose not to acquire the shares and let the option fall away. A new shares option grant could then be negotiated.

Shares in a foreign company operating in the UK

For a UK resident offered shares in a foreign company operating in the UK, the UK income tax liability will be the same – but only while that individual is resident and working in the UK.

Periods of non-UK residence during the vesting period can be apportioned out on a straight-line basis. When the individual receives shares in the foreign company, they may face a withholding tax charge from the overseas tax authority. This can be avoided by providing that authority with a certificate of UK residency from HMRC.

Capital gains tax

On the disposal of shares, an individual will pay capital gains tax calculated by comparing the disposal proceeds to the market value of the shares when the options were exercised.

Deadline for reporting unapproved share option plans

Employers should be aware there is 6 July deadline for reporting unapproved share option plans to HMRC.

Can we help?

If your business is interested in making the most of unapproved share options, talk with your Shipleys contact or speak with one of our specialists shown on this page.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary.

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