When a company grants an employee a securities option, the employee is not given securities outright, but is given the right to acquire them under certain conditions. Sometimes the employee will pay something for the option. A securities option is defined in the legislation as a right to acquire securities, and the legislation therefore covers more than a “share option”, as the term is normally understood. A share option will normally set out,
An option is exercised when the employee buys those shares - in
other words, has exercised their rights under the option. It is
very common for some or all of the shares to be sold at the same
time as the option is exercised, although for practical reasons the
sale may not actually take place until a few days after the
exercise. This may be because the employee may need to fund the
exercise price (the amount to be paid for the shares), and the tax
and NICs liability on the option gain. An employee may also prefer
the certainty of cash in his hand immediately.
An option can be granted over any type of security. The main
rules dealing with options from 16 April 2003 are in Chapter 5 of
Part 7 of ITEPA 2003.
On 1 January 2005, Simon is granted an option over 5,000 shares in the company he works for, United Dyers plc, at £3 per share. He can exercise the option at any date between 1 January 2008 and 31 December 2008. On 1 January 2005 the market value of the shares was £2.74. Simon watches the share price rise, and decides to wait until the final month of the option's life before exercising his rights. In December 2008 the shares are worth £4.80. Simon buys 5,000 shares for £15,000 and immediately sells them for £24,000, making himself a £9,000 profit.
In legal terms an option is a contractual legal entitlement
given by one party (normally the employing company) to another, for
consideration or under deed or seal. A simple offer of an option,
or a resolution by the Board of the company that shares should be
allotted, does not constitute a legally enforceable right to
shares. But offer and acceptance alone are sufficient to create a
contract in Scotland.
However, a right to acquire shares can be much wider than a
contractual option, and can be created, for example, under the
terms of an employment contract. Where a company declares a rights
issue of shares this will give the holders of the original shares a
“right” to acquire further shares, which can be within
the wider definition of “option” in the legislation.
HMRC officers may obtain advice on options granted under the
law of other countries from the Employee Shares and Securities
Unit, Room G52, 100 Parliament Street, London. SW1A 2BQ: e-mail
shareschemes@hmrc.gsi.gov.uk
