1. Share Options Dave Mouncey

2. Share Option The right to receive a share in the future, usually with the price set at the date right is granted.

3. UK Tax Treatment General Situation No tax on the grant of the option Income tax on the exercise of the option Capital gains tax on the ultimate sale of the share.

4. Income Tax on Exercise Gain computed as difference between market value at date of exercise and the exercise price For a higher rate taxpayer gain taxed at 40% If share a ‘readily convertible’ asset then social security liability arises (employers at 12.8%)

5. Capital Gain on Sale Gain computed as difference between sale proceeds for share and market value of share at exercise If share held for two years, tax on gain reduced from 40% to 10% due to ‘business asset’ taper relief

6. Enterprise Management Incentive Scheme One of the UK tax advantageous share schemes No tax on grant or exercise of option Tax only on sale of shares Capital gains on sale not income tax Business asset taper relief applies from date of grant No social security contributions

7. Examples Company value at date grant £1m 1.1.00 Options over 10% of shares and exercise price £30,000 Company value at date of exercise £10m1.2.01 Company value at date of sale of share £20m 1.1.02 Shares are ‘readily convertible’ assets

8. Usual Tax Treatment £ Income tax on exercise: Market value at exercise 10m x 10% x 30%300,000 Less: exercise price30,000 Gain 270,000 Income tax 40%108,000 Employer NI 1%2,700 Employer NI 12.8%34,560

9. Gain on Sale £ Sale proceeds £20m x 10%2,000,000 Market value at exercise(300,000) Gain 1,700,000 CGT @ 40%680,000

10. EMI Treatment £ No tax on exercise No social security Tax on sale Proceeds 2,000,000 Exercise price 30,000 1,970,000 CGT tax @ 10%197,000

11. Comparison Usual EMI Proceeds 2,000,0002,000,000 Less: Exercise price(30,000)(30,000) Less: Income Tax(108,000)- Employee NI(2,700)- Employer NI(34,560)- Less: Capital gain (680,000)(197,000) Net 1,144,7401,773,000 Retained 57.24%88.65%

12. … and if £2m income (eg bonus) £ Bonus 2,000,000 Employers NI (226,950) Employers NI(17,730) Income Tax @ 40% (709,220) Net1,046,100 Retained52%