What are the advantages and disadvantages of unapproved options?
Unapproved options are a relatively simple, and very common, way of allowing those that support your business to share in its growth and success.
They are an extremely flexible scheme that can be issued to both companies and individuals, who can be employees, contractors, advisers or consultants. There are no limits to the number of options that can be given in total or to an individual.
While they don't require an HMRC-approved valuation like EMI (hence the name "unapproved"), obtaining a valuation is still recommended to ensure there are no tax implications when options are granted to non-employees.
Unapproved options also need to be included in an annual report to HMRC via ERS, if they have been given to employees or directors.
The major disadvantage is that there are no tax benefits associated with the scheme for the recipient.
When an individual exercises the options, they are liable for income tax on the difference between the exercise price and the market value of the shares at the time.
In addition, in the case of an employee, they may also be liable to pay NI on this, if the shares are readily convertible to cash at the point of exercise (e.g. in a sale scenario).
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