With unapproved employee share options, when they are exercised there is a charge to income tax and Class 1 NI.

Unapproved Share Options and tax | AccountingWEB

When the shares are subsequently sold, am I correct in thinking that the income tax and NI suffered on the 'benefit' at the purchase will form part of the cost of acquisition for CGT purposes?

Ken - thank you Right I'm with it. I hadn't cottoned on to what you were saying in the earlier post, but that clarifies it absolutely.

I have already asked my client to check the paperwork. Anyway thanks - this thread has been really helpful. Looking at the national insurance aspect further. The unapproved options are for quoted shares in a plc.

UK Unapproved Share Options

In the particular case the employee already has earnings in excess of the Class 1 NI limit. I ask because the employer has given the employer the distinct impression that the I would assume therefore that the options must have been offered on those terms.

Presumably your client would recall if he'd signed a joint election, otherwise there must be something in the paperwork covering this - I can't see that the employer can impose unilaterally. However, it is quite normal, and the facility was introduced since otherwise employers would have an open-ended NIC liability dependent upon when employees decide to exercise their options - this is the quid pro quo if you like.

I agree it's complicated! I agree with you regarding the benefit in kind and RCA, and as these are quoted shares they would come under PAYE and Class 1NI and not 1A. I've been asked to calculate the tax for a recipient of both approved and unapproved share options in a quoted company, that were about to be exercised, with a subsequent immediate sale.

I have done my calculations including Class 1 NI on the benefit on exercising the unapproved options. The area I was having difficulty with was the CGT base costs, but am now reasonably happy that these are the option exercisable price for the approved, and the exercise date market value for the unapproved. Fortunately I have not been asked to get into identification rules were the sale to be dripped out over a period, although I appreciate that this would give the benefit of business asset taper relief.

I think the charge is under s62 ITEPA as earnings, not the benefits code. PAYE will apply if the shares are readily convertible assets as defined in s ITEPA.

Say it with shares | Tax Adviser

If there is a market for the shares these will be RCAs but if they are unquoted this may be unlikely unless a sale or flotation is in prospect.

Otherwise, unquoted shares are deemed to be RCAs unless a corporation tax deduction may be claimed under Schedule 23 FA , for the difference between what the employee pays and the MV. However, as they are not BIKs I do not think they are P11D-able either. The employee does need to include on his return as employment income.

As far as I can see, if the shares are not RCAs they are not NIC-able. This, together with the Schedule 23 deduction, would seem to make unapproved share options fairly tax efficient, unless I've got the wrong end of the stick - particularly the NIC bit.

I'll have to look into some more. Thanks Ken Ken Thanks for the detailed reply.

Having followed the legislation threads from your reply I've ended up at CG, where example 2 fits the set of criteria, so although the tax charge is not part of the CGT base cost, the benefit that the tax charge is levied on is part of the base cost.

No There's no provision for this but there is provision under s ITEPA that if the employee agrees to pay the employer's NIC that is deductible. The amount on which tax is charged however is part of the acquisition cost under sA TCGA. If the shares are restricted and no election under s ITEPA is made to be taxed on the unrestricted value then an income tax charge may arise when there is a chargeable event.

If the only restriction is the Table A restriction on transfer then the shares are arguably not restricted within the terms of the legislation s because SV will, I understand, usually agree that the normal Table A restriction on transfer does not affect the market value and s 1 requires not only that there is a restriction as described in subsections 2 to 4 which includes freedom to dispose of the shares , but the MV of the shares must also be lower as a result.

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