How Are Share Options Granted To Non-Employees Taxed?

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    How are share options granted to self-employed contractors, such as consultants and advisers, taxed by HMRC?

    Jonathan Lea

    Unfortunately the tax situation is still complicated for non-employees which relates to HMRC seeing the options/shares as a way of non-employees avoiding income derived for work carried out that they would otherwise declare in their tax return.

    The tax hit depends on where you set the exercise price for the options. There is no tax liability on grant of the option, but the option holder pays income tax on market value (at point of exercise) minus strike price and then capital gains tax on the disposal price minus market value at exercise. Because of the tax disadvantages with unapproved options, it’s more efficient for the option holder to exercise as early as possible after vesting, in order to reduce the income tax charge, therefore we would normally suggest quarterly (or even every six months) exercise dates. This is unlike EMI options, where exercise has no tax consequence, assuming the exercise price matches the HMRC valuation agreed when the scheme is set up.

    Jonathan Lea

    Given the uncertainty, complexity and potential tax liability (in the future) on exercise it is often preferred to issue non-employees with actual shares (or a certain class of shares) at the outset, with such shares being subject to reverse vesting whereby the company’s right to buy back the shares (backed by a power of attorney) declines over time so long as the non-employees have met any performance conditions, or other carefully defined criteria.

    Also note that if the option is being granted as part of an investment in shares in the company, or the provision of loan finance to the company, by the individual then although there is no specific guidance on this point it would appear that the tax treatment of the option in the investor’s hands would follow the tax treatment of the actual equity or loan finance (the grant of options forming part of the consideration).

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