Why use non tax-advantaged share options?

By Tolley in association with Ken Moody
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The following Employment Tax guidance note by Tolley in association with Ken Moody provides comprehensive and up to date tax information covering:

  • Why use non tax-advantaged share options?
  • Share options
  • Tax efficiency
  • Flexibility
  • Alternatives
  • Tax treatment
  • Drawbacks

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.

Tax efficiency

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.

Enterprise Management Incentives

EMI will almost always be the right answer for companies that qualify (see the Why use an EMI scheme? guidance note). The problem is that entry is restricted to companies or groups with assets of no more than £30m and with fewer than 250 employees. Additionally, companies in certain industries are precluded from taking advantage of the obvious tax benefits that this scheme offers.

Even when EMI is available, there is a limitation in that no employee can hold more £250,000, calculated by reference to the value of options at the date on which they are granted