Unapproved Share Option Schemes

January 26, 2023 Freddie Nicolle Brace

Unapproved share options – What you need to do

In this week’s newsletter, Dragon Argent continues our series looking at how to motivate employees, this time by summarizing unapproved option schemes, otherwise known as non tax-advantaged share options.

What is an Unapproved Share Option Scheme?

An “Unapproved” Option Scheme is an option scheme which does not have any tax advantages for employees/staff and therefore does not need HMRC approval. Where options are part of a Long Term Incentive Plan (LTIP), the price is usually set at nil.

Employees are then given a right to exercise their option, but if the share price at exercise is set lower than the option price (‘underwater’) - then the employee may choose not to do so.

Advantages of Unapproved Share Option Schemes

✔️ Can be offered to non-employee staff and non UK resident employees

✔️ No legislation governing the terms of the scheme

✔️ Do not need to be offered to all employees/staff

✔️ The majority of companies are free to operate an unapproved scheme

✔️Low set up cost

✔️ No limit on the amount of options that can be granted

✔️ There is potentially corporation tax relief available for the company on the acquisition of shares following the exercise of the option

✔️ The company can elect to pass on employer's NICs to the employee who is granted the option

Disadvantages of Unapproved Share Option Schemes

❌ No tax advantages

❌ No corporation tax relief on the set-up costs of the scheme

❌ Registration of the scheme as well as annual filings are required

Unapproved Share Option Schemes are Best Used When:

The company wants to incentivise staff who are not employees
Employees are non-UK resident
The company does not qualify for EMI or CSOP purposes
Employees have already used up their limits for awards granted under tax advantaged schemes

HMRC Approval
As the Rules of an unapproved plan do not have to be agreed with HMRC, they can be drafted wider than for approved plans and can often better reflect the commercial terms of the issuing company.

For any questions you may have setting up a an unapproved option scheme, contact us by scheduling a discovery call with one of our experts and we will be happy to help you.

Disclaimer: the guidance contained in this article is not a substitute for legal advice. Before implementing any option scheme, you should seek appropriate advice from a qualified legal professional.