Share options gain glitter

AS WE come out of recession and share prices rise, the share options that are granted under an approved share option scheme are looking ever more attractive. In a study of 145 share options by Income Data Services published last week, the average gain was more than pounds 100,000. Gains ranged from pounds 1,907 for a director of Scapa Group to more than pounds 1.3m by the chief executive of Smith New Court - a profit of 147.8 per cent.

The approved executive share option scheme was introduced by the Government in 1984, and immediately became an important part of the remuneration packages offered to top executives.

After October 1987, however, when the market fell, many executives found themselves holding share option certificates that were worthless, as the option price was higher than the market price of the shares.

But times change, and many executives granted options at the bottom of the market are now sitting on handsome paper profits. Not surprisingly, there has recently been some profit-taking in the market, and now is the time for employees to dust down their old share option certificates and consider whether they should exercise their options.

The price at which the options can be exercised must be fixed when the options are granted and must not be less than the market value of the shares at the date of grant.

An exception to this rule is that options can be granted at a 15 per cent discount to market value in cases where the company also has an all-employee share scheme. Institutional investors are generally opposed to the 15 per cent discount.

Under an approved share option scheme, employees can be granted options over shares up to pounds 100,000 or four times salary if that is greater. Thus an employee earning pounds 50,000 could have options over pounds 200,000 worth of shares, whereas an employee earning pounds 20,000 could still have options over pounds 100,000 worth of shares.

There will usually be no income tax on either the grant or the exercise of the option. There will, however, be a liability to capital gains tax on the ultimate disposal of the shares. But if the gain comes within the pounds 5,800 annual allowance, there will be no CGT to pay.

To avoid any tax traps, the options should not be exercised earlier than three years from the grant date. The options must be exercised within 10 years from the grant date. There must also be a three-year gap between the last non-taxable exercise and the next exercise date.

Before individuals can exercise their options they will need to check whether any performance criteria were attached to the exercise. Publicly quoted companies are encouraged by their institutional investors to attach performance criteria - for example, that there should have been real growth in earnings per share - before individuals can exercise their options.

Fortunately, the legislation allows for the early exercise of options in certain circumstances, which broadly fall under two categories of 'clemency' and 'takeover'.

If an employee retires, is injured, disabled or is made redundant, options may be exercised within six months of leaving employment. If an employee dies leaving unexercised options, the personal representatives can exercise the option within 12 months.

Options would normally lapse if the individual ceases to be employed by the company for any other reason. But some scheme rules allow options to be exercised in such circumstances at the discretion of the directors. If an employing company leaves the group, options can be exercised within six months of that date.

Employees holding share options in a company that is taken over also have six months.

Brian Friedman heads the employee benefits practice at Arthur Andersen. .

(Photograph omitted)

News
peoplePerformer had recently been diagnosed with prostate cancer
News
The surrealist comedian at the Q Awards in 2010
people
News
i100
Arts and Entertainment
Media baron Rupert Murdoch owns News Corps and 20th Century Fox
theatrePlaywright David Williamson is struggling to find a big name to star as the media mogul
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
Six of the 76 Goats' cheese samples contained a significant amount of sheep's cheese
food + drink
News
i100
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Arts and Entertainment
JK Rowling will not be releasing a 'romance' novel anytime soon
books
Life and Style
tech

Of all the computers Apple has ever made there’s only one that Steve Jobs had to sell his car to finance

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

£350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?