When is a valuation needed for unapproved options?

While unapproved options don’t have any statutory requirements for a valuation – hence the name ‘unapproved’ – there are some instances where recipients of the options need a valuation for tax purposes. 

So let’s see the scenarios where a valuation may be needed depending on who the options are being granted to. 

When granting to UK non-employees and companies 

If options are granted below market value to UK non-employees and companies, there is a potential income tax/VAT liability. 

So determining the market value of the shares by way of a valuation before granting the options can ensure recipients know what – if any – tax they have to pay on the receipt of the option. 

When granting to international recipients 

Whether the recipient is an employee or not, some countries set tax liabilities on the grant of the option, so again a valuation may be handy for overseas recipients. 

If you’re granting to US taxpayers, a 409A valuation is required to determine the Fair Market Value (FMV) of the shares. This also sets the exercise price and tax liabilities for the recipient. 

A 409A valuation is essential for the granting company too, as it gives the company ‘Safe Harbour’ status, which is an extra line of protection from any IRS audits. 

What about when granting to UK employees or directors? 

The great thing about unapproved options is that they’re incredibly flexible when granting to UK employees and directors. 

Options can be granted at, above or below market value with no tax consequences at the time of grant, provided the options are exercised within 10 years. 

However, you do have to submit the value of your business at the point of grant during your annual notification, so it might be useful to get a valuation – or at least have an understanding of the value of the shares which the options are granted over. 

When it comes to exercising their options, if the shares can be sold immediately (e.g. at an exit event), both income tax and National Insurance are due on the difference between the exercise price and the sale price. 

In cases where there isn’t an open market for the shares and they cannot be sold immediately, the option holder can decide whether to pay Income Tax at that point based on the Actual Market Value (AMV) or Unrestricted Market Value (UMV) of the shares. 

So it’s important that the option holder knows the AMV and UMV at the time of exercise for their own tax liability. But also for the granting company, as the AMV and UMV have to be entered into the following annual notification too. 

We go into much more detail about unapproved options and tax.