What is the tax treatment of unapproved options?

Unapproved options have no tax on grant (if exercise price ≥ market value), income tax and NIC on exercise on the gain (market value at exercise minus exercise price), and CGT on disposal on any further gain. No BADR is automatically available. Unapproved (non-tax-advantaged) options are share options that do not qualify for any tax-advantaged scheme. The tax treatment: (1) Grant — no income tax or NIC on grant, provided the exercise price is at or above the market value of the shares at the date of grant. If the exercise price is below market value, income tax may be due on grant (on the unrestricted market value minus the exercise price). (2) Exercise — income tax and NIC are due on exercise, on the gain (market value of the shares at exercise minus the exercise price). The gain is taxed as employment income at the employee's marginal rate (up to 45%). Employer NIC may also be due. (3) Disposal — CGT is due on disposal, on any further gain (sale proceeds minus market value at exercise). The standard CGT rate applies (24% for higher-rate taxpayers). BADR is not automatically available (the employee would need to meet the separate 5% shareholding and officer conditions). The total tax on unapproved options can be significantly higher than on EMI or CSOP options, as income tax at up to 45% applies on exercise (compared to 0% for EMI/CSOP), and the CGT rate is 24% (compared to 10% BADR for EMI/CSOP). Relevant legislation: ITEPA 2003, Part 7, Chapter 2 (employment-related securities options); TCGA 1992 (CGT on disposal). Example: An employee is granted unapproved options with an exercise price of £100,000 (market value at grant). On exercise, the shares are worth £500,000. Income tax at 45% on the gain of £400,000 = £180,000. The employee sells the shares for £500,000. CGT at 24% on £0 (no further gain) = £0. Total tax: £180,000. If the options were EMI, the total tax would be £40,000 (10% BADR on £400,000). The unapproved tax is £140,000 higher. Common mistake: Using unapproved options when the company qualifies for EMI or CSOP. The tax difference can be enormous, and failing to use tax-advantaged schemes can result in employees paying significantly more tax.

What are RSUs and how are they taxed?

RSUs (Restricted Stock Units) are a promise to give the employee shares at a future date. No tax on grant, income tax and NIC on vesting (when shares are issued) on the market value, and CGT on disposal on any further gain. Restricted Stock Units (RSUs) are a form of share-based compensation where the employer promises to give the employee shares (or the cash equivalent) at a future date, subject to vesting conditions. The tax treatment: (1) Grant — no income tax or NIC on grant, as no shares are issued at this point. (2) Vesting — income tax and NIC are due on vesting (when the shares are issued to the employee). The taxable amount is the market value of the shares at the date of vesting. This is taxed as employment income at the employee's marginal rate (up to 45%). Employer NIC is also due. (3) Disposal — CGT is due on disposal, on any gain after vesting (sale proceeds minus market value at vesting). The standard CGT rate applies (24% for higher-rate taxpayers). RSUs are commonly used by US-listed companies and large multinationals, as they are simple to administer and align with US accounting and tax rules. Unlike options, RSUs do not require the employee to pay an exercise price — the shares are issued for free (subject to vesting). However, the full market value at vesting is subject to income tax, which can result in a significant tax charge even if the employee does not sell the shares. Many companies offer 'sell to cover' arrangements, where a portion of the shares is sold to cover the income tax liability. Relevant legislation: ITEPA 2003, Part 7, Chapter 2 (employment-related securities); ITEPA 2003, Part 7, Chapter 4C (restricted interests in securities). Example: An employee is granted 10,000 RSUs. On vesting, the shares are worth £10 per share (total £100,000). Income tax at 45% on £100,000 = £45,000. The employee receives 10,000 shares (or fewer if 'sell to cover' is used). If the employee sells the shares for £120,000, CGT at 24% on £20,000 gain = £4,800. Total tax: £49,800. Common mistake: Not planning for the income tax charge on vesting. RSUs trigger a full income tax charge on the market value at vesting, even if the employee does not sell the shares. Without a 'sell to cover' arrangement, the employee may need to fund the tax from other sources.

When should I use unapproved options instead of EMI or CSOP?

Use unapproved options when: the company does not qualify for EMI/CSOP (listed, excluded trade, over limits), the employee has exceeded EMI/CSOP limits, the recipient is a non-employee (consultant, advisor), or the employee is outside the UK. Unapproved options and RSUs are used when tax-advantaged schemes (EMI, CSOP, SAYE) are not available or are insufficient. Common scenarios: (1) Non-qualifying companies — listed companies, companies in excluded trades (banking, property, farming), companies with gross assets over £30 million (for EMI). These companies cannot use EMI and may need to use CSOP (if they qualify) or unapproved options. (2) Exceeded limits — employees who have exceeded the EMI limit (£3 million) or CSOP limit (£60,000) can receive additional options as unapproved options. This is common for senior employees with large option holdings. (3) Non-employees — consultants, advisors, and non-employees do not qualify for EMI (which requires employment). Unapproved options can be granted to non-employees, though the tax treatment may differ (income tax vs CGT, depending on the arrangement). (4) International employees — employees outside the UK may not qualify for UK tax-advantaged schemes, especially if they are not UK-resident or do not meet the work commitment requirement. Unapproved options can be granted to international employees, with the tax treatment depending on the employee's residence and the location of the work. (5) Flexibility — unapproved options offer maximum flexibility (no limits, no restrictions on share classes, no qualifying company requirements). The trade-off is the less favourable tax treatment. Relevant legislation: ITEPA 2003, Part 7 (employment-related securities); Schedule 5 ITEPA 2003 (EMI); Schedule 4 ITEPA 2003 (CSOP). Example: A listed company wants to grant share options to its senior employees. EMI is not available (listed company). CSOP is available but has a £60,000 limit. For options above £60,000, the company uses unapproved options. The first £60,000 of options qualifies for CSOP tax advantages, and the excess is unapproved. Common mistake: Using unapproved options for all employees when some could qualify for CSOP (up to £60,000). Combining CSOP and unapproved options can provide tax advantages on the first £60,000.

What is joint ownership (flower shares)?

Joint ownership (flower shares) is a structure where the company and employee jointly acquire shares, with the company retaining the existing value and the employee acquiring the growth. This splits the growth and reduces the employee's income tax. Joint ownership (also known as 'flower shares') is a share incentive structure where the company (or an existing shareholder) and the employee jointly acquire shares in the company. The structure works as follows: (1) Joint acquisition — the company and the employee jointly acquire new shares in the company. The company pays for the existing value of the shares, and the employee pays for the growth potential. (2) Growth shares — the employee acquires a class of shares that only participate in future growth (similar to growth shares). The company retains the existing value through a separate class of shares. (3) Valuation — the market value of the employee's growth shares at acquisition is low (as they only have value above a hurdle). The employee acquires the shares at this low market value, with no income tax (as the acquisition is at market value). (4) Disposal — when the shares are sold, the employee's gain is subject to CGT (potentially at 10% if BADR conditions are met). The company's gain is subject to corporation tax. (5) Tax efficiency — the structure reduces the employee's income tax (as the acquisition is at a low market value, not the full share value) and defers the tax to disposal (CGT instead of income tax). However, the structure is complex and requires careful legal and tax documentation. The employment-related securities rules must be followed, and specialist advice is essential. Relevant legislation: ITEPA 2003, Part 7, Chapter 4C (restricted interests in securities); ITEPA 2003, Part 7, Chapter 5 (post-acquisition benefits); Companies Act 2006 (share issues). Example: A company is valued at £10 million. The company and an employee jointly acquire new shares: the company acquires preference shares (representing the existing £10 million value) for £10 million, and the employee acquires growth shares (representing future growth above £10 million) for £1,000 (market value). When the company is sold for £15 million, the growth shares are worth £5 million. The employee's gain is £4,999,000 (£5 million - £1,000), subject to CGT (potentially at 10% BADR). Without joint ownership, the employee would have needed to acquire shares worth £1 million at full market value, with income tax on the gain. Common mistake: Implementing joint ownership without specialist advice. The structure is complex, and incorrect implementation can result in unexpected income tax charges under the employment-related securities rules.

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Unapproved Options & RSUs

When EMI and CSOP are not available, unapproved options and RSUs are alternatives. Understand the tax treatment, when to use them, and how to structure them efficiently.

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Unapproved (non-tax-advantaged) options and Restricted Stock Units (RSUs) are share-based incentive arrangements that do not qualify for the tax advantages of EMI, CSOP, or SAYE. They are used by companies that cannot use tax-advantaged schemes (e.g., listed companies, non-qualifying companies) or for employees who have exceeded the limits of tax-advantaged schemes. While less tax-efficient, unapproved options and RSUs can be effective commercial tools for incentivising employees.

Unapproved Options

Unapproved options are share options that do not qualify for any tax-advantaged scheme. The tax treatment: (1) No tax on grant (if the exercise price is at or above market value). (2) Income tax and NIC on exercise on the gain (market value at exercise minus exercise price). (3) CGT on disposal on any further gain. Unapproved options are flexible — there are no limits on value, no qualifying company requirements, and no restrictions on share classes or employees.

RSUs (Restricted Stock Units)

RSUs are a promise to give the employee shares (or cash equivalent) at a future date, subject to vesting conditions. The tax treatment: (1) No tax on grant (as no shares are issued). (2) Income tax and NIC on vesting (when the shares are issued), on the market value of the shares at vesting. (3) CGT on disposal on any gain after vesting. RSUs are commonly used by US-listed companies and large multinationals.

When to Use Unapproved Options/RSUs

Unapproved options and RSUs are used when tax-advantaged schemes are not available or are insufficient: (1) Non-qualifying companies — companies that do not qualify for EMI (e.g., listed companies, companies in excluded trades, companies over the £30m asset limit). (2) Exceeded limits — employees who have exceeded the EMI (£3m) or CSOP (£60k) limits. (3) Non-employees — consultants, advisors, and non-employees who do not qualify for EMI. (4) International employees — employees outside the UK who may not qualify for UK tax-advantaged schemes.

Structuring for Efficiency

While unapproved options and RSUs are less tax-efficient than EMI/CSOP, they can be structured to minimise the tax: (1) Growth shares — using growth shares with a hurdle can reduce the income tax charge on exercise/vesting (as the market value at grant is lower). (2) Joint ownership — joint ownership (flower shares) can split the growth between the employee and the company. (3) Phased vesting — phasing the vesting of RSUs can spread the income tax charge over multiple years. (4) Salary sacrifice — in some cases, the employee can sacrifice salary in exchange for shares, reducing the income tax and NIC. Specialist advice is needed to structure unapproved arrangements efficiently.

Key Points

What You Need to Know

Unapproved options and RSUs do not qualify for tax-advantaged scheme benefits
Income tax and NIC are due on exercise/vesting on the gain
Used when EMI/CSOP are not available or limits are exceeded
RSUs are taxed at vesting (when shares are issued), not at grant
Can be structured with growth shares or joint ownership to reduce tax

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All Share Schemes Topics

EMI Eligibility & Qualifying Companies EMI Tax Advantages Company Share Option Plan (CSOP)Growth Shares Business Asset Disposal Relief (BADR)Share Schemes on Exit Save As You Earn (SAYE / Sharesave)Unapproved Options & RSUs Share Incentive Plan (SIP)Employee Ownership Trusts (EOTs)Share Valuation for EMI & CSOP HMRC EMI Notification & Reporting Phantom Shares & Cash-Settled Awards Share Schemes on IPO

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