What is an Unapproved Share Option plan? Is it the right type of share scheme for your business?
Unapproved share options are a discretionary type of employee share scheme similar to a CSOP (Company Share Option Plan). Unapproved share options are much more flexible than CSOPs as they do not have to meet any statutory requirements or limits, however, this also means that these schemes are not tax-favoured as they fall outside the relevant tax legislation.
Unapproved share options can be useful for a company that does not qualify for a CSOP or EMI Options (perhaps because the team members you wish to incentivise are based overseas) or for a company that wants to grant options over and above the CSOP limits.
How should I structure unapproved share options for my team?
Unapproved share options are often “exit based” meaning they incentivise employees to work towards an exit by providing share options that are only exercisable by the employee on an exit. However, they can be structured in a number of ways.
Everyman Legal can help you design and structure a scheme that will suit you and your company and compliment your succession plan. Often employee share schemes are ineffective because they do not take such factors into account.
Our dedicated team, based in Witney, Oxfordshire, would be happy to answer your questions.
What is the tax treatment of unapproved share options?
There is no income tax charge on the grant of unapproved share options provided they are exercised within 10 years. However, the company will need to report the grant of the option to HMRC on the annual return Form 42. On exercise of the option income tax will be payable on the difference between the option exercise price and the market value of the shares at the date of exercise. If the shares are “readily convertible assets” when the option is exercised (e.g. because the company is being sold), then PAYE must be operated and there will be national insurance contribution liability for the employee and the company on any option gain.
If shares are acquired and then sold at a later date, capital gains tax will be charged. This will be on a sale of the shares on the difference between the market value of the shares on the date of exercise (plus tax paid) and the price for which the shares are being sold.
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