An approved, or “executive” share option scheme, as the name suggests, requires HMRC approval and as such, the rules of the scheme must fall within the HMRC guidelines. They are particularly suitable for family or owner-managed companies because only selected employees need be included.
These schemes operate by granting the participants options to purchase shares in the company at a later date, but with the price fixed at the outset, which is usually the market value of the shares at the date the options are granted.
The granting of options can be made dependent upon the achievement of specific performance targets, but the total value of share options held by a participant at any time cannot exceed £30,000 (based on the market value of the shares at the date the options were granted).
Options can be exercised at any time between three and ten years after they have been granted.
An employee will be eligible to participate in an approved share option scheme if they work for at least 25 hours per week, and do not own more than 25% of the share capital.
There is no tax or national insurance charge on the grant of the share option or on its subsequent exercise.
On the disposal of the shares, the capital gain is calculated by comparing the disposal proceeds, to the price paid for the shares when the options were exercised.
On exercise, the company will obtain a corporation tax deduction for the difference between the market value of the shares at that time less any amount paid by the employee for the shares.
The main difference between the approved and unapproved schemes is that with an approved scheme there are no tax implications for the employee when the options are exercised – the tax charge is deferred until the shares are disposed of at which point the employee should have the cash to meet the tax liability.