Unapproved share options and ISA allowance

nipster1

Hi All,

I have unapproved share options with my company and it recently floated on the AIM.

I am trying to find out if there is anything I can do with my ISA allowance to make the process of purchasing them as tax efficient as possible.

If I understand it the only option to me is a "bed and ISA" arrangement where I will pay income tax and NI upon them because I have technically exercised them even though I retain ownership. However, I will save on any capital gains tax and also income tax on dividends in the future.

Is there someone out there who can confirm this for me?

jamesd

You've correctly described the usual treatment of unapproved share options.

The difference between the price at time of exercise and the exercise price is PAYE taxable income for the employee. Nothing you can do with an ISA can improve the tax efficiency of this. You may be able to improve the tax efficiency with pension contributions or by exercising in smaller amounts if the extra income would cause you to pay higher or top rate income tax.

Bed and ISA makes no difference because that's just a combination of exercise and sell then rebuy inside the ISA.

There is no CGT liability at the time of exercise. There can then be later, with the purchase price for CGT purposes being the price of the purchase, not the exercise price.

It's worth knowing that in standard investing theory the optimal holding time for share options is as long as possible, until the day before expiration plus some safety margin. A substantial part of the value of options is not having to spend the money to buy them initially but instead having the potential investment gains without paying that ownership cost or having the risk of actual ownership. This doesn't mean that you should never exercise options, particularly where you anticipate large price increases that would substantially increase the tax payable, just that delaying should usually be the default position.

There is one other case where exercising options early can be good. When the options are a high part of your net worth. In that case it can be better to exercise the options and buy other investments instead, to reduce your financial dependence on the single firm that is both your pay source and much of your wealth.