Why use non tax-advantaged share options?

An employee share option is a right to acquire shares in the company that the employee works for, or sometimes its parent. The option will usually have a fixed price and a defined period during which it can be exercised.

The fixed price can be anything from zero to the current market value or even more. Typically, in order to encourage the retention of staff, the minimum option period will be two to three years.

The intention is to give employees a chance to become involved and interested financially in the success of the company or group for which they work.

If the shares are not worth more than the exercise price when the option vests or becomes exercisable, the employee could defer taking up the offer and wait until the value increases to give them a gain ― depending upon the time limit for the exercise of the option.

See Example 1.

It must be said that non tax-advantaged (NTA) share options are not tax-efficient, and employers should also consider whether a tax-advantaged scheme will achieve the company’s goals and incentivise their employees. There are two tax-advantaged scheme choices available. They are summarised below.