What is a USOP and how does is work?

With an unapproved share option plan (USOP), employees are given options to acquire  shares at a future date at any price specified by the company, usually the market value of the shares on the date the option is granted, for non-Executive employees.

Where options are part of a Long Term Incentive Plan (LTIP) the price is usually set at nil.

The employee is given a right to exercise their option, but if the share price at the point that exercise can be made is lower than the option price (‘underwater’) then the employee may choose not to do so.

Such schemes do not require HM Revenue & Customs (HMRC) approval, and the ability to exercise the options may be governed by performance targets.

Qualifying individuals

There is no requirement for all employees to be granted options and the scheme can be set up on a selective basis for certain individuals only.

Tax Treatment

If the option has to be exercised within 10 years of its grant, there will be no tax or national insurance charge when the option is granted.

On the exercise of the option there will be an income tax liability on the difference between the market value of the shares at that date, and the price paid for them.

On the disposal of the shares, the capital gain is calculated by comparing the disposal proceeds to the market value of the shares when the options were exercised.

There will be no national insurance charge on the grant or exercise of an option if the shares over which the options are granted, are not readily convertible into cash, which means there are no arrangements by which the shares’ value can be realised with certainty. In practice this means that there is no available market, no arrangements made by an employer to repurchase the shares and the company is not quoted on a recognised stock exchange (e.g. FTSE). For this purpose, AIM counts as unquoted.

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.

Next steps

UHY Ross Brooke’s tax team is experienced in share option plans, so if you have any further questions about the above or any other reward planning matters then please do not hesitate to contact Phil Kinzett-Evans.