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
Alan Bennett criticised the lack of fairness in British society encapsulated by the private school system
peopleBut he does like Stewart Lee
News
Former Governor of Alaska Sarah Palin, left, with her daughter, Bristol
newsShe's 'proud' of eldest daughter, who 'punched host in the face'
Sport
David Moyes and Louis van Gaal
football
Arts and Entertainment
Sheridan Smith as Cilla Black and Ed Stoppard as her manager Brian Epstein
tvCilla Episode 2 review: Grit under the glamour in part two of biopic series starring Sheridan Smith
PROMOTED VIDEO
News
i100
Life and Style
Vote with your wallet: the app can help shoppers feel more informed about items on sale
lifeNew app reveals political leanings of food companies
Arts and Entertainment
The cover of Dark Side of the Moon
musicCan 'The Endless River' carry on the tradition? See for yourself
Sport
New Zealand fly-half Aaron Cruden pictured in The Zookeeper's Son on a late-night drinking session
rugby
Voices
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
Arts and Entertainment
Salmond told a Scottish television chat show in 2001that he would also sit in front of a mirror and say things like,
tvCelebrity Trekkies from Alex Salmond to Barack Obama
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
food + drink
News
Rob Merrick's Lobby Journalists were playing Ed Balls' Labour Party MPs. The match is an annual event which takes place ahead of the opening of the party conference
newsRob Merrick insistes 'Ed will be hurting much more than me'
News
A cabin crew member photographed the devastation after one flight
news
Life and Style
Carol O'Brien, whose son Rob suffered many years of depression
healthOne mother's story of how London charity Maytree helped her son with his depression
Life and Style
The Google Doodle celebrating the start of the first day of autumn, 2014.
tech
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

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Quantitative Risk Manager

Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

Day In a Page

Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits