So employees should not be charged to income tax when the conversion happens as a result of, say, a company reconstruction. Share Options 14. Under normal tax rules, when an employee is granted an option over shares, he or she pays no income tax at the time of grant, but instead pays income tax when the option is exercised and the shares acquired. It is at this latter stage that the employee receives the benefit of the option. However, when share options are granted that can be exercised more than seven years after the date of grant, there is a charge to income tax if the option price is less than the market value of the shares.
Many companies offer share options that can be exercised three to ten years after grant.
In many cases the intention is to offer these options at the market value of the shares, but changes in the share price over the short period between setting up the arrangement and the date of grant, can bring them into the income tax charge. Although very little income tax is usually paid at this stage, determining the precise amount of that tax can be a significant administrative task. This will take most options outside the income tax charge on grant, reducing the administrative burden on business, while continuing to protect the Exchequer. This change will apply to share options awarded on or after 6 April 1998. Share options granted and exercised in accordance with the rules of an approved share option scheme will continue to be eligible for exemption from income tax and will be unaffected by these proposals.