Prior to 6 April 1999, a NICs liability arose on the grant of an
option rather than on the actual gain from the exercise of an
option. There are therefore some transitional provisions relating
to options granted before 6 April 1999 which are rolled over after
that date.
Equally PAYE on share option exercise only arises in respect
of options granted after 26 November 1996. The following is a
summary of the transitional provisions.
A share option is a right to acquire shares. Both the PAYE
regulations and the NICs regulations apply on the exercise of
options, but only if the rights were acquired on or after the
relevant dates. A full Chronology of the NICs legislation is set
out in
ERSM170710.
PAYE applies to the gain on exercise of share options where
the rights were acquired on or after 27 November 1996. NICs applies
to the gain on exercise of share options where the rights were
acquired on or after 6 April 1999. It may therefore be important to
be able to establish the date on which the rights were acquired.
When a share option is granted the right to acquire shares
will be acquired on the date of grant of the option. Events during
the life of the option may mean that the option is given up in
exchange for another option. When this happens the replacement
option may be equivalent to the old option but, although it is
equivalent, the grant of the replacement option is the acquisition
of a new right to acquire shares.
Example
Employee is granted option over 100 shares in Company A.
Company A is taken over by B and the option is replaced by an
option over 200 shares in Company B. At the time of take-over
Company B’s shares are worth half as much as Company
A’s shares. The option is equivalent but the replacement
option represents a new right to acquire shares and the date on
which the right was acquired is the date of the roll-over.
PAYE position
Because of this, if an option were granted before 27 November
1996, but rolled over after that date, then on the exercise of that
replacement option PAYE will be due.
NI position
Options granted before 6 April 1999 that are rolled over
after that date will not have a liability to NICs on the gain on
exercise to the extent that the two options are equivalent. If the
replacement option has a higher total market value than the old
option then there will be a NICs liability when the option is
exercised if the shares or the option are RCAs. There may also be a
NICs liability on the event of the roll-over itself if the amount
of the total discount on the new option is higher than the old
option.
If you are not sure on what date rights to acquire shares
were obtained you may ask ESSU (see
ERSM10040) for advice once you have
obtained all the relevant facts.
