Locking key staff into your business with share options


Share options are a popular, tax efficient way of incentivising key employees. They are particularly relevant to companies looking to grow their value with a view to an exit in the short to medium term, writes David Bennett, tax partner.


A share option is simply a right to acquire a set number of shares at a set exercise price, at a future date. The exercise price is usually set at a discount to the current pro rata value of the company.


Hence, if options are granted over five per cent of the shares of a company whose value is £1m, the exercise price might be in the order of £1,000.


Fast forwarding to the future when the company is sold for, say, £5m, the employee would be able to exercise his options and receive £25,000 for his five per cent, less the £1,000 exercise price.


But why not simply give shares in the company rather than options? The reason is tax. A gift of shares attracts two tax and national insurance charges: the first at the time of the gift and the second at the time of the sale. There are complex rules which make the uplift in value partly chargeable to income tax and partly to capital gains tax.


By contrast, an HMRC approved share option gives rise to no tax charge on the grant or exercise of options. There is just a charge to capital gains tax on the sale of the shares.


Share options can be used very flexibly. You can cherry pick the employees to be given options, set your own performance criteria that are required to be met before they can be exercised, and withdraw options from employees who leave. HMRC approved schemes come with a number of conditions, but it is usually possible to design a tax efficient scheme that works well for both the employer and the employee.