Unapproved (or 'non tax-advantaged') share options

Share options for non-employees - consultants, non-exec directors and others


As with any other discretionary option plan, an unapproved share option plan involves the granting of a specific number of options to an individual. These options will provide that the individual can, at an agreed date or point in time, acquire a given number of shares (the underlying shares) for a fixed price.

Given that there is both no upfront cost to acquiring the options and no requirement for the individual to pay over any monies unless the underlying shares increase in sufficient value there is little risk attached to the receipt of options. As a result, the tax treatment and rates applicable will often appear to be very similar to cash bonuses.

Key considerations

Grant of options

o The terms of the options will need to be set out in a suitable legal document (known as the Rules or option agreement). The Rules will govern all pertinent matters between the company and employee and, given the tax complexities that can occur in such arrangements, a suitable and up to date precedent should be obtained.

o One of the key terms will be the price that the individual has to pay to acquire the share (the exercise price). No tax arises on the granting of share options. As a result, the exercise price can be set at any figure from a share’s nominal value upwards.

o Under an unapproved plan, there is no limit as to how many options are granted, as a result, an unapproved plan may be used in conjunction with an approved plan where the intended award level is in excess of the limits allowed by the approved share option plan.

Terms of the options

o As the Rules of an unapproved plan do not have to be agreed with HMRC, they can be drafted wider than for approved plans and can often better reflect the commercial terms of the issuing company.

o Whilst each set of Rules will contain its own unique terms, there will be a number of important areas common to all Rules including length of the option period, vesting conditions and leaver provisions.

o The option period will run from the date the options are granted until an agreed date in the future. The period can run to any length of time.

o Vesting conditions are particular requirements that must be fulfilled before the employee can exercise the option and can be broken down into two broad areas: time requirements and performance conditions.

◦ Time requirements will set out the period during which the option must be held before exercise can occur. This will be a commercial decision and will reflect the minimum length of time that the company would wish the employee to hold the option before acquiring the underlying share.

◦ Options do not need to vest all at the same time and, often, there may be a phased approach such that only a proportion of the options can be exercised at particular dates in the future.

◦ Even where the options are within the window in which they could be exercised based on the time requirements, some of the options may still not be considered to have vested if the additional performance conditions are not also met. Performance conditions can either be personal to the individual or be based on corporate performance. In order to avoid uncertainty, any performance condition should ideally be capable of objective measure.

o Leaver provisions will govern what rights an employee has in respect of keeping the options on leaving employment or other association with the company. As options will typically be offered as part of a retention package to employees, directors or consultants, the leaver provisions will often be drafted such that all the options lapse on employment ceasing.

Exercise of the options

o Broadly speaking, on exercise, there will be a tax charge for the employee equal to the difference between the price paid for the share and the market value of the underlying share acquired on the date of exercise.

o Unless the underlying share acquired is a readily convertible asset (RCA) there should be no NIC due on employee or employer. Shares would be RCAs where there is a ready market or buyer for the shares.

o The company will need to receive a sum of money from the employee equal to the total of number of options exercised multiplied by the exercise price.

o In addition to the exercise price, the employee will, at the relevant date, have to pay the tax/NIC liability on acquiring the shares. However, if, as terms of the share acquisition, some of the shares cannot be sold by the time that the tax is due, this will mean that the employee will have to find the necessary funds from other sources.

Tax treatment and reporting

Tax on company

o The granting of the option is not a taxable event for the Company other than Employers' NIC will be due from the company on the exercise of the option if the underlying share acquired is an RCA. Where this is the case, Employers' NIC will need to be paid over to HMRC in the PAYE payment that relates to the tax month in which the option is exercised.

o A corporation tax deduction should be available for the company (as per CTA 2009, Pt 12) equal to (a) the amount assessed liable to income tax on the individual employee and (b) any Employers' NIC paid over.

Tax on individual

o The receipt of options, for a UK resident individual, is not a taxable event for the individual employee.

o Income tax will be due on the difference between the exercise price and the relevant market value of the underlying share acquired on the date of the exercise.

o Where the share acquired is a RCA, the income tax and Employee's NIC will initially be paid over to HMRC by the employing company, with the employee due to refund these monies within 90 days in order to avoid the additional charges due for late reimbursement.

o Where the underlying share is not an RCA, only income tax will be due. This will need to be paid via the employee's self-assessment tax return (SATR) in the normal manner.

Tax reporting requirements for the individual

o The acquisition of the share option is not reportable for UK resident employees.

o Where the shares acquired are RCAs, all taxes paid in relation to the exercise of the options should be recorded on the P60 received from the employer and no further reporting should be required.

o Where the shares acquired are not RCAs, the current requirement is for the employee to record the amount due on the additional information pages to the SATR (SA101).