This article explains how tax is liable depending on the circumstances of the holder and the company
IF YOU ARE AN EMPLOYEE with the company that granted you the options at point of exercise
Exercising your options when still an employee, and the shares are not immediately able to be sold
You have a choice as to whether to pay income tax at that point based on the AMV (Market Value) of the shares or the UMV (Unrestricted Market Value).
- If you choose the, likely higher, UMV then you will have a higher income tax bill now, based on the difference between the exercise price and the UMV, but all the upside to point of sale will only be subject to Capital Gains Tax. In this instance you must complete an ITEPA S431 election within 14 days to ensure that no further income tax is liable.
- If you choose to be tax assessed on the AMV, however, you may have a lower income tax bill now, based on the difference between the exercise price and the AMV, but on eventual sale the differential that you have saved now will be applied to further gains such that they will partly be exposed to both income and capital gains tax.
Exercising your options when still an employee, and the shares can be immediately sold
In this circumstance, both income tax and NI are due on the difference between the exercise price and the realisable sale price. This must be paid by the company via PAYE and then reimbursed by the shareholder back to the company within 90 days.
IF YOU ARE NO LONGER AN EMPLOYEE with the company that granted you the options at point of exercise, or never have been
Under these circumstances you are no longer caught by the employee related benefits tax legislation.
You must therefore pay income tax in your annual tax return based on the difference between the exercise price and the Actual Market Value (AMV) of the shares at the time. At eventual sale, capital gains tax will be due on any further gains from that point.