Share Scheme Manual - SSM7.4

valuation of options at grant and shares at exercise

It is common in share option schemes for employees to be able to acquire their shares at the market value at or around the time the option is granted.

For the purpose of valuing the option where the eventual exercise will be chargeable under ICTA88/S135(1), then the legislation at ICTA88/S135(5) sets a minimum value for the option which is the difference between:

• the market value of the shares on the date the option is granted and

• the option price (the price the optionholder will pay for the shares),

Where a potential Schedule E charge arises on the grant of an option, because the option is a long option (see SSM3.11 - SSM3.12), there can therefore be a tax charge if the option price has been fixed by reference to a date or dates other than the date of grant.

Example

1.3.1999 Option granted over 10000 shares, exercise period to 1.3.2012. Exercise price fixed by reference to the lowest price in the 30 days prior to 1.3.1999, which is £2.15 per share. Actual price on 1.3.1999 is £2.20 per share.

Under ICTA88/S135(5) the minimum value of the option which is assessable under Schedule E is the difference between:

• Market value of shares on option grant date:

10000 x £2.20 = £22000

• Exercise price: 10000 x £2.15 = £21500.

The assessable `value` of the option is therefore £500. Unless the individual considers that the option has a greater value, the £500 is the amount which should be included in the SA return.

On the exercise of a share option the value of the shares to be considered is the amount which might reasonably be obtained on the date of exercise. It is the value on the date of exercise which is relevant in determining the taxable amount on exercise.