Options in effectively obtaining a share of your company's growth

TaxTalk – July 2023

Phil Clayton sets out the pros and cons of the different share option schemes and highlights some potential tax pitfalls.

There are many different ways your company might incentivise you to stay with the business, most relate to rewards like your salary, your bonus, free fruit or your benefits package. But when it comes to share option schemes, it’s important to understand how it affects your taxes. Some schemes offer HMRC approved tax benefits, others can catch people off guard and be more expensive than anticipated.

Enterprise Management Incentives (EMIs)

The EMI scheme is available to smaller companies and gives your company an opportunity to grant you options up to the total value of £250,000 in any three-year period. These options offer very favourable tax treatment:

At Grant – there are no income tax or National Insurance Contribution (NIC) implications when granted the option
At Exercise – when you exercise your options and purchase the shares, there are only income tax or NIC implications if the option price is below the Market Value at the grant date. Otherwise, no tax implications on exercise assuming within 10 years of the grant
At Sale – at the sale of your shares, you pay Capital Gains Tax (CGT) on the difference between the value at grant of the option and your sale proceeds.

If you were granted the options more than two years before your sale, you will likely qualify for Business Asset Disposal Relief (BADR) (formerly Entrepreneur’s Relief), which can reduce your CGT liability from 20% to 10%.

In most case, EMI option holders only ever end up paying CGT at 10% on the gain realised on their options received through the company.

The “little brother” of the EMI scheme, the CSOP has fewer restrictions on the company itself. The options must be granted at market value with no discount, and you can be granted up to £60,000 of options (prior to 6 April 2023, this was limited to £30,000).

At Grant – when the options are granted, there are no tax implications
At Exercise – if the options are exercised at least three years after the grant, but within ten years of the grant, there are no income tax or NIC implications.

There can also be no tax implications in certain scenarios for ‘good leavers’ leaving employment, on a takeover, or some other qualifying events. Otherwise, income tax and NICs can be due when you exercise the options outside of the 3-10 year window and may be collected through PAYE

At Sale – at sale, your gain liable to CGT at 10% or 20% will be calculated as your proceeds less the exercise costs (and the value liable to income tax if relevant).

BADR is not as easy to come by as with EMI and follows the “normal” rules of owning 5% of the company’s shares as well, so is unlikely to qualify.

In most cases, you would only be liable to CGT at 10% or 20% on the gains you realise when selling your shares.

Save As You Earn (SAYE)

SAYE share option schemes are nearly as simple as they sound. During a specific period (three or five years), you will make monthly savings into the scheme of up to £500 per month through your employment. At the start of the designated period, you will be offered your share purchase price that may be discounted by up to 20%.

At the end of the designated period, the scheme pays a bonus (and sometimes interest), and you can use these funds to purchase the shares at the agreed price.

At Grant – as with the other schemes, there are no tax implications when offered the scheme
At Exercise – when the agreed period is over, any bonus and any interest you receive is tax free (you could walk away with this cash with no tax implications).

Should you elect to exercise the options and purchase the shares, there are no income tax implications at all

At Sale – the only tax implications for the SAYE scheme is CGT when you dispose of the shares, this will be the proceeds less the purchase price of the shares including the bonus and interest amounts.

If you were to leave before the required three or five years was complete, you would not be able to exercise the options and purchase the shares. However, you are able to withdraw your cash (with any bonus or interest from the scheme) and this amount is still tax free.

A potential added bonus with the SAYE scheme is the ability to avoid CGT all together. You will not pay any CGT if you transfer the shares into an ISA within 90 days of the scheme ending, or directly to a pension when the SAYE scheme ends.

Non-Tax Advantaged Option Schemes

If the company does not have one of the HMRC approved schemes above, they may still try and incentives you with shares options.

Similar to the other option schemes, they could offer you non-tax advantaged options:

At Grant – similar to the above, there are no tax implications at the grant of the option

At Exercise – unlike the HMRC approved schemes, there will always be income tax implications at exercise. The value of the shares at exercise, less the cost you paid for them, will be treated as employment income and liable to income tax.

If the shares are “readily convertible” (can be easily converted to cash – for example, the company is listed on a stock exchange) NIC will also be due on the value, and this will be collected through PAYE

At Sale – similar to the above, there can still be CGT implications on your sale of the shares. This is calculated on your sales proceeds less the market value at exercise.

Therefore, if you sell the shares shortly after exercise, there may be no CGT due on disposal.

With these option schemes, if not readily convertible, it can leave you with a tax liability and no cash to pay it. If readily convertible, the company may offer you “sell to cover” opportunities, where at exercise they sell the required shares to cover your income tax and NIC liability collected through PAYE.

Other (non) options?

Your company might not offer share options, but instead HMRC’s approved Share Incentive Plan (SIP) which is not covered in this article but offers beneficial treatment on acquiring shares.

Otherwise, the simplest route may be to gift you shares in the company straight up. The implications on you can be quite significant here:

Generally you will be liable to income tax on the actual value of the shares you receive, this could mean you will have a tax liability with no cash to fund it. The situation does become more complex when the shares gifted have restrictions over them, or other conditions. Restrictions on shares can change the treatment of the share on award and the position when restrictions lift and on future disposal.
Like above, if the shares you receive are considered “readily convertible”, NIC will also be due on the value. The income tax and NIC will need to be collected through PAYE.

Finally, where a company does not want to offer physical shares, but still wants you to benefit from the growth in value, they can offer Phantom Share Schemes. These are cash bonuses measured by reference to the value of the shares at the time. These schemes are taxed the same as any other cash bonus.

It would be best to ask your employer to confirm the tax implications of any shares or schemes they offer, or to take personal tax advice, to ensure you are aware of the relevant position.

	EMI	CSOP	SAYE	Non-advantaged
Grant	No tax implications	No tax implications	No tax implications	No tax implications
Exercise	No income tax or NIC if the exercise price is equal to the full market value at grant	No income tax or NIC due if exercised between 3 and 10 years	Any bonus or interest from the scheme is tax free. No income tax or NIC due on exercise of the options.	Income tax (and maybe NIC) due on the difference in the exercise value and the exercise price
Sale	CGT is due on the increase in value between grant and sale. BADR can be available if option was granted at least two years ago.	CGT is due on the increase in value between grant and sale.	CGT is due on the increase in value between the purchase price and sale. Options to avoid CGT transferring to ISA or Pension	CGT is due on the increase in value from exercise to sale.