Grant to sale for a UK option
A UK option grant sets a strike price, normally equal to the share's market value at grant, and a vesting schedule, commonly four years with a one year cliff. The employee can exercise vested options while employed and usually for a limited period after leaving, subject to good leaver and bad leaver terms in the option agreement, whether the grant sits under EMI options or another scheme.
- Grant: strike price and vesting schedule fixed, no tax due at this point under any scheme
- Vesting: portions become exercisable, still generally no tax due
- Exercise: employee pays the strike price and receives shares, tax treatment depends on the scheme
- Sale: shares are sold, usually at an exit, triggering Capital Gains Tax on any further increase
Exercise and sale tax by scheme
| Scheme | Tax at exercise | Tax at sale |
|---|---|---|
| EMI | None, if strike at or above HMRC agreed value | CGT on gain since grant, BADR may apply |
| CSOP | None, within the 60,000 pound limit and conditions met | CGT on gain since grant |
| Unapproved | Income tax and NIC on spread between market value and strike | CGT only on gain since exercise |
NIC means National Insurance contributions. Both employee and, in some cases, employer NIC can apply to unapproved option exercises, and the employer charge can sometimes be passed to the employee by agreement, which is one reason many companies prefer CSOP once EMI is unavailable.
Cashless exercise and board approval processes
To exercise, an employee pays the total strike price, often through a cashless exercise arranged at a liquidity event so the strike is deducted from sale proceeds rather than paid upfront. Companies should have a clear exercise notice process and keep records of fair market value at each grant date, since this underpins the equity tax analysis for years afterwards.
- Cashless exercise is common at exit, avoiding the need for employees to find cash upfront
- Early exercise before an exit is possible but leaves the employee holding illiquid shares
- Board approval and updated share register entries are needed each time options are exercised
Exercise and tax questions for UK options
- Do employees pay anything at grant?
- No. Tax only arises later, either at exercise for unapproved options or effectively at sale for EMI and CSOP options exercised within the rules.
- What is a cashless exercise?
- A mechanism where the strike price is deducted from sale proceeds at an exit rather than paid in cash by the employee before the sale completes.
- Can an option scheme change after grant?
- The scheme type is fixed at grant. A company cannot retroactively convert an unapproved option into an EMI option, though it can grant new EMI options going forward if it later qualifies.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.