1

Share Options Scheme

CSOP EMI SAYE SIP
Qualifying Restrict to Key Restrict to key employees Must be open Must be open to all
employees employees only only (must own ≤ 30% & to all
work for substantial
amount of time for the
company)
Maximum total £30K £250K (reduced by value £5 - £500 per Free = £3.6k pa
Value at grant of any shares held under month maybe Partnership =£1.8k pa
per employee SCOP) saved per (max 10% salary)
employee from
Company may only have net income Matching 2:1
£3m in issue at any one
time
Conditions No discount at May issue at discount Max 20% Hold for atleast 3yrs
Grant discount at (except partnership
Exercisable ≥3 yrs Exercisable ≤ 10yrs time of issue shares)
and ≤ 10 yrs And 5 yrs for maximum
Company must have gross benefit
If own >30% of assets ≤£30m, be trading,
company maybe quoted or unquoted
=excluded from
scheme Company group must have
less <250 employees at
time of grant
Tax treatment at No Income Tax or No Income Tax or NIC No Income Tax No Income Tax or NIC
Grant NIC or NIC on issue of free or
matching shares

Partnership shares are

Tax Treatment No Income Tax or If issue at discount, the
at Exercise NIC discount is taxable
employment income
£ the MV when withdrawn.
Exercise Price X
MV at Grant (X)
Taxable X
Or the difference between
the exercise price or MV of
shares at exercise, if lower
purchased out of income,
no income tax on
dividends used to buy
partnership shares
No Income Tax If withdrawn in 3 yrs,
or NIC Income Tax and class 1
NIC is payable, based on
If withdrawn 3-5 yrs,
Income Tax and class 1
NIC is payable, based on
lower of:
(1) MV when first
awarded, and
(2) MV when withdrawn
from the SIP

If withdrawn after 5 yrs,

no Income tax/NIC
Tax treatment at Normal Capital Normal Capital gain based Normal Capital If withdrawn after 5 yrs,
disposal gain based on on: gain based on no CGT
proceeds less £ proceeds less
exercise price Proceeds X exercise price If withdrawn within 5 yrs,
Exercise price (X) £
Amount taxable Proceeds X
at exercise (X) Amount taxable
Taxable Gain X at withdrawal (X)
Taxable Gain X
BADR period of ownership
runs from date of grant,
and no need to own > 5%
 2

Question 1: CSOP or unapproved

Adrian Black, an employee, is granetd an option in October 2016 to acquire 1000 shares in his employing
company,a quoted trading company, before 1 October 2022 at £8 each. When the option is exercised in
November 2022 the shares are worth £20 each. Adrian buys and sells the shares on the same day at same
price.
Adrian is a higher rate tax payer who atleast earns £50,000 pa and has no other capital gains in 2022/23.

Requirements
Calculate the tax charges on the exercise of the option and on the disposal of the sharess assuming:
a) The share optionn scheme is an approved share option plan; or
b) The scheme is unapproved

Question 2: Approved share option Scheme

Compubuy Ltd is a trading company breaking into the e-commerce market. Its gross assets are £20 million.
The market value of its ordinary shares is 125p each on 31 August 2021, at which time the company grants to
Alison an option over 80,000 shares under a Enterprise Management Incentive(EMI) scheme. The cost of the
shares under the option is fixed at 120p per share.

Alison is a full time employee of Compubuy Ltd and currently holds no other share options. Compubuy Lad has
£2million of such share options in issue.

Requirements
Show the taxation consequence for Alison if:
a) The option is erercised on 31st August 2023 when the market value of the shares is 350p; and
b) The shares are then sold on 30th June 2024 for £750,000.
Question 3 (Exam Question - December 2011) (Extract)
Morice is the finance director of Babeen plc. Babeen plc is a non-close quoted trading company. Morice wants
to provide information to the company’s employees on a proposed approved Save As You Earn (SAYE) share
option scheme.
The following information has been obtained from a telephone conversation with Morice.

Proposed approved SAYE scheme rules:

– Employees will invest in the scheme for five years.
– The scheme will permit monthly investments of between £5 and £600.
– The scheme will be open to all employees and directors who are at least 21 years old and have worked full-
time for the company for at least three years.
– The share options granted under the scheme will enable employees to purchase shares for £2·48 each.

Detailed explanations, with supporting calculations, requested by Morice:

– Whether or not each of the proposed rules will be acceptable for an approved SAYE scheme.
– The tax and national insurance liabilities for the employee in the illustrative example below in respect of the
grant and exercise of the share options, the receipt of the bonus and the sale of the shares on the assumption
that the scheme referred to meets all of the conditions for approval.

Illustrative example – SAYE scheme that has been approved by HMRC:

– The share options will be granted on 1 January 2022 to purchase shares at £2·48 each.
– The employee will invest £250 each month for five years.
– A bonus equal to 90% of a single monthly payment will be paid at the end of the five-year period.
– The amount invested, together with the bonus, will be used to exercise share options.
– The share options will be exercised on 31 December 2026 and the shares will be sold on the same day.
– The employee’s interest in the employing company will be less than 1%.
– A share in the employing company will be worth; £3·00 on 1 January 2022, 4·00 on 31 December 2026

Required:
Prepare the DETAILED explanations, with supporting calculations, as requested by Morice in respect of the
proposed SAYE scheme.
 3

Tax Efficient investments

EIS SEIS VCT
Level of Risk High Not as high
- Only one company invested in & Unquoted - Risk spreads over a number
of investments & Quoted
Qualifying  Subscribe in Cash  Subscribe in cash
Individual  New Ordinary shares  Newly issued shares
 Qualifying company
 Owns ≤ 30% of OSC
 Not director or  Not Current Employee
employee (can be director or
current employee)
Qualifying  Unquoted trading company  VCT must be quoted on a
Company/VCT  Have a permanent establishment in UK stock exchange or EEA
 Full time employees  Full time employees  Qualifying investments =
≤250 ≤25 70% in EIS qualifying co,
 Gross assets ≤£15m  Gross assets ≤£0.2m no more than 15% in single
before and ≤£16m before subscription co.
after subscription  Not previously used  Approved by HMRC
 Funds must use to EIS or VCT  Less than 250 employees
develop/grow co (not  Carrying on a trade <2
to purchase of yrs old, or preparing to
company/trade) carry on trade
 Carrying on a trade
<7 yrs old, or raise
qual. funds in 7yrs
Max Funds  £5m in any 12 months £150,000 in any 3 yrs £5m in any 12 months
company can  Must not more than period
raise £12m via
EIS/SEIS/VCT,
lifetime
Max Investment £1million p.a £100,000 p.a £200,000 p.a
by Individual
Minimum 3years 5years
retention period
for IT relief
IT relief: deducted % of amount subscribed % of amount subscribed % of amount subscribed =
from IT liability = 30% = 50% 30%
Carry back Any amount invested but Any amount invested but No carry back
amount to cannot get relief on more cannot get relief on more
previous tax yr than £1million in any one than £100,000 in any
tax year one tax year
Dividend income Taxable Exempt
CGT on disposal  Gain – Exempt if held > 3yrs No gain or loss whenever sold
 Loss
 Allowable
 Can elect to convert into IT loss
CGT deferral relief  Gain on any  50% of gain on any Not available
chargeable asset = chargeable asset =
deferred if proceeds exempt if sale
reinvested in EIS proceeds reinvested in
shares SEIS shares
 Gain crystallizes
when EIS shares are
dispose off
IHT – BPR 100% if owned ≥ 2yrs No BPR
 4

Question 1 (EIS reinvestment Relief)

Alex sold a painting in November 2021 for £275,000 realising a capital gain of £150,000.
Alex subscribes for qualifying EIS shares in Milan Ltd, a trading company, the following month at a cost
of £268,000. She has no other capital transactions for 2021/22, but has capital losses brought forward
from 2020/21 of £6,000
Three years later in 2024/25 Alex sells the EIS shares making a profit of £175,000.

Requirement
(a) Calculate the amount of reinvestment relief that Alex should claim.
(b) Explain the capital gains tax consequences of the sale of the EIS shares before 2024/25.
(c) What will be the implications if EIS shares are sold within three years and for less than the cost?

Question 2 (EIS deferral relief, planning)

Chris sold his 10% holding in Cracker Ltd in September 2020 for £750,000, realising a capital gain of
£250,000.He acquired the shares in July 2019 and has been a director of Cracker Ltd throughout his
period of ownership.
In November 2021 he subscribed for qualifying EIS shares in Cream Ltd, a trading company, at a cost of
£375,000.
Chris had no other capital transactions in 2021/22 but has capital losses brought forward of £50,000.

Requirement:
Calculate the amount of EIS reinvestment relief that Chris should claim in 2021/22 and discuss the
interaction with Entrepreneurs' relief.

Question 3
Harry invested £40,000 in a qualifying EIS company on 1 August 2021.

Requirement
Calculate the tax reduction he is entitled to if he:
(a) Subscribes for qualifying EIS company shares, or
(b) Subscribes for qualifying SEIS company shares

Question 4 (SEIS reinvestment relief/Withdrawal of SEIS relief)

Zosia sold an antique vase in June 2021 for £150,000 realising a capital gain of £75,000. In August 2021
she subscribed for qualifying SEIS shares in Browns Ltd.
She has no other capital transactions for 2021/22, but has a capital loss brought forward of £16,000.

Requirement
(a) Calculate Zosia’s taxable gains for 2021/22 assuming the SEIS shares cost:
(i) £60,000
(ii) £125,000
(b) Explain the capital gains tax consequences if Zosia sells the SEIS shares in 2026.
(c) Explain the capital gains tax consequences for Zosia, assuming that in 2023 she sells all of the SEIS
shares for £65,000:
(i) To her sister, not in an arm's length transaction
(ii) To her friend, in an arm's length transaction.
Note: Consider both of the scenarios where she originally subscribes for shares at a cost of £60,000, and
at a cost of £125,000
 5

Question 5
In June 2021 Joe won £60,000 on the National Lottery. He wished to invest this money tax efficiently
and, following professional advice, he subscribed £40,000 to an EIS investment in June 2022. He wishes
to carry back the investment to 2021/22. Joe also subscribed £20,000 to a VCT in August 2022.
Joe has asked you to calculate his tax liabilities for 2021/22 and 2022/23 and has given you the following
information:
2021/22 2022/23
Salary 65,000 65,000
Dividends received from EIS investment 6,600
Distribution from VCT 7,800

Requirements
(a) Calculate Joe’s income tax liabilities for 2021/22 and 2022/23.
(b) Explain the effect of selling his EIS and VCT shares in either May or Sep2025.
Assume tax rates and allowances for 2021/22 apply in future years.

Question 6
Matthew has the following investment income in addition to a salary of £90,000:

 Dividends from VCT investment of £7,000

 Discretionary trust of £3,630
 IIP trust of £4,500
 SEIS investment of £3,500
 REIT of £5,000

He also invested £50,000 in a qualifying EIS scheme during the tax year.
He also sold 11% £10,000 Government stock on 31 May 2021 which he originally acquired on 1 July
2020. Interest is payable on 31 December and 30 June each year and the proceeds were £12,000.
He has paid private pension contributions during the period of £13,260.

Requirement:
Calculate the income tax liability for 2021/22.