Purpose of granting options
In order for an option to be a qualifying option, it must be granted for genuine commercial reasons, to recruit or retain an employee in a company. An option does not qualify if it is granted as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is to avoid tax.
Maximum individual limit
An employee may be granted qualifying options over shares with a total value of £250,000. The £250,000 limit applies from 16 June 2012; prior to that date, the individual limit was £120,000.
The shares under option include all EMI options granted by the employing company and any companies that are members of the same group of companies. The value of the shares under option for this purpose is the value of the shares at the time the option was granted.
Any options granted in excess of this limit are not qualifying options in so far as they relate to the excess. If an option is granted that exceeds £250,000 limit (£120,000 for any options granted before 16 June 2012) the option will be a qualifying option up to the individual limit and the excess will not be a qualifying option and so will not have any tax advantages.
CSOP options in individual limit
The individual limit includes the value of any Schedule 4 Company Share Option Plan (CSOP) options granted by the employing company and any companies that are members of the same group of companies. A Schedule 4 CSOP option is an option to acquire shares granted under a scheme that meets the requirements of Schedule 4 ITEPA and the maximum value of shares which may be subject to a Schedule 4 CSOP option is £30,000.
The value of the shares under option for this purpose is the value of the shares at the time the option was granted.
Valuation of shares for individual limit
The value of the shares for the purpose of the individual limit is the Unrestricted Market Value (UMV) of the shares. This means that, if the shares are restricted, they are valued as if they were not restricted.
If the shares under option are quoted on the London Stock Exchange, the market value is based on the prices on the Stock Exchange’s Daily Official List. If shares are not quoted on the London Stock Exchange, the company may offer its own valuation. In that case, HMRC may enquire into the valuation. Alternatively, the company can ask HMRC Shares and Assets Valuation (SAV) to agree a valuation with them before the option is granted. This valuation will be in accordance with Part 8 of TCGA 1992.
Maximum entitlement – 3 year limit
Once an employee has been granted EMI options, or EMI and Schedule 4 Company Share Option Plan (CSOP) options up to the £250,000 limit then no further EMI qualifying options can be granted until 3 years after the last of those options was granted, even if some options have been exercised or released. Once the 3 year limit has expired then further EMI options can be granted to the extent that any other EMI or Schedule 4 CSOP options then held are below the £250,000 limit.
Maximum company limit
The total Unrestricted Market Value (UMV) of shares under EMI options granted by the company cannot exceed £3 million at any time( so the limit is £3 million unexercised qualifying options). If an option is granted that causes this limit to be exceeded, the option is not a qualifying EMI option as to the excess. If more than one option is granted at the same time which causes the limit to be exceeded, the non-qualifying excess is divided amongst the options pro rata.
Granting an EMI option in parallel with another EMI option is acceptable. This means granting 2 EMI options to the same person on the understanding that only one option can ever be exercised and that the other option falls away when the first option is exercised. This concept has been used, for example, to parallel discounted options with tough performance targets with non-discounted options that have no or more lenient targets. For the purpose of the EMI limits, only the maximum number of shares which may be acquired under either option need be counted; there is no need to take into account the value of both if only one can ever be exercised.
It is not a requirement that both options are granted at the same time, but it must be clearly stated within the terms of the second option that if either of the options is exercised the parallel option will cease to be capable of exercise.
In order for this arrangement to be acceptable, the grant of the second “parallel” option must not change the terms of the first option which must remain capable of exercise, until it lapses or is given up. If the first option is exercised then the terms of the second option must provide that the second option will cease to be capable of exercise in these circumstances. Similarly, if the second option is exercised a condition of the exercise must be that the first option is either released or cancelled without consideration. Making such a provision in the terms of the second option will not be regarded as changing the terms of the first option.
A “cashless exercise” procedure where shares are sold immediately after exercise is not a cash alternative and is therefore normally acceptable provided the scheme rules allow for this. The important point to note here is that the participant must acquire the shares subject to the option upon exercise of that option. It is NOT acceptable if shares are sold prior to exercise (or options given up) as the participant would in effect be receiving cash for giving up all or part of his option.