The first stage in setting up the scheme is to prepare a valuation of the company and in turn the shares upon which options will be granted. We will set the value of the option as low as justifiably possible on the basis that they represent such a small amount of the overall share capital. Once this is done we will agree this valuation with HMRC.

The options should have conditions attached to them which may be based upon the employee and/or the company achieving certain targets. The most important of these is continuous employment (if an employee leaves then their options should lapse).

There should also be a minimum period set before the options can be exercised.

Within 92 days of the issue of options HMRC need to be informed.

 The Tax Treatment for Employees – Approved Scheme (EMI)

The grant of an option has no tax effect on the employee.

Upon the exercise of an option there is also no tax charge as long as the value paid is the value agreed with HMRC as at the grant of the option. If the amount paid is less than the agreed valuation there will be an income tax charge on the difference.

On the sale of shares there will be a capital gains tax charge on the difference between the disposal proceeds and the price paid for the option. If at least one year has elapsed between the issue of the option and the disposal of the shares entrepreneurs’ relief at 10% may apply and any gain can be set against an individual’s CGT allowance of £11,100.

The Tax Treatment for Employees – Unapproved Scheme

The grant of an option has no tax effect on the employee.

Upon the exercise of an option there will be a charge to tax and National Insurance on the difference between the current share value and the cost of the option. This can be met by the company.

On the sale of shares there will be a capital gains tax charge on the difference between the disposal proceeds and the price paid for the option. If at least one year has elapsed between the issue of the option and the disposal of the shares entrepreneurs’ relief at 10% may apply and any gain can be set against an individual’s CGT allowance of £11,100.

If an option is to be exercised upon an exit event then the whole difference between the option price and sales value will be chargeable to income tax. In this event a higher rate of tax is applicable and no annual allowance applies.

Don’t hesitate to contact us for more details – [email protected]