An overview of share options without tax advantages
Typically called unapproved share options (or non-approved options) and sometimes long term incentive plans (LTIPs)
What does “unapproved” mean?
How does it work?
When is tax due?
Can we choose which of our employees participate?
Are there any limits?
Can my company have an unapproved plan or LTIP?
What does "unapproved" mean?
“Unapproved” simply means a scheme that does not benefit from HMRC approved tax breaks.
Like all other forms of share option, an unapproved share option is a right to acquire shares from a future date at a fixed price. The fixed price is commonly the value of the shares at the date the option is granted, the object being to provide a reward for the option holder based on future growth in share value.
However, the price is sometimes set at nil or a nominal amount, so if the option is exercised the option holder simply calls for the shares to be transferred to him for no or only a very small payment. Options with a nil exercise price or similar arrangements are often called Long Term Incentive Plans (LTIPs). LTIPs are often coupled with performance targets, so the option may only be exercised if the company (or part of its business) improves performance to a specified level.
When is tax due?
Income tax and employee NICs will often be collected under PAYE, following option exercise. However, where the shares are not readily convertible into cash, so only income tax (and not NICs) is due, the employee who has exercised the option must declare the gain in a self-assessment tax return for the tax year in which the option is exercised.
Can we choose which of our employees participate?
Yes, you can choose any employee or executive director to participate.
Are there any limits?
It isn’t subject to any HMRC limits.
Can my company have an unapproved plan or LTIP?
Almost certainly.
In this table we attach our own ratings for unapproved share options for tax efficiency, ease of setting up and overall incentive and reward value:
| Tax efficiency (individual) | Tax efficiency (Company) | Ease of setting up | Overall incentive reward value | Other issues |
|---|---|---|---|---|
| Income tax on option gains. May also be NICs | CT deduction on option gains. | Must be registered with HMRC. | Simple to explain, no risk, not tax efficient. | Can be difficult if company sold for shares, earnout, or deferred consideration |
To explore how employee ownership or an employee share scheme could work for your company, call me on 020 3818 9420.