tax treatment of unapproved share option schemes

Many companies operate share option schemes for their employees.  Please see below a summary of the tax treatment and reporting requirements in relation to Unapproved Share Option Schemes.

What do I receive when I am granted a share option by my employer?

When a company grants a share option to an employee, they are given the right to acquire a pre-determined number of shares at a pre-determined price for a predetermined period. Such option schemes are commonly referred to as “unapproved share option schemes”.

What information will I get from my employer when I am granted a share option?

Where a company grants a share option to an employee, it will generally issue documentation covering the following:

  • the number of shares that the employee can acquire
  • the price that the employee has to pay for the shares (“Option Price”)
  • the dates from which, and by which the employee may exercise his or her option (“Exercise Period”), and
  • the conditions regarding the right to exercise the option

What is meant by “date of exercise”?

The “date of exercise” is the date at which the employee takes up their right to acquire shares.

Must I pay to acquire the shares under a share option?

The shares may be at no cost to the employee (nil option) or at a predetermined price that the employer has set. In some cases, the employee will have to pay something for the option itself.

Are there different types of unapproved share option schemes?

There are two types of share options for tax purposes:

(a) a ‘short option’ – which must be exercised within seven years from the date it

is granted; and

(b) a ‘long option’ – which can be exercised more than seven years from the date

it is granted.

What are the tax consequences if I exercise a share option?

When an employee exercises his/her right to the share options and acquires the shares at the pre-determined price, the difference between the price paid to acquire the shares (the exercise price) and the market value of the shares at the date of exercise of the option is called the share option gain. The share option gain can be reduced by any payment made by the employee for the initial grant of the option.

Where an employee exercises a share option he or she must pay what is referred to as “Relevant Tax on Share Options” (RTSO) in respect of any income tax due on any gain realised on the exercise of the share option. RTSO is payable within 30 days of an option being exercised.

Will my employer look after the payment of tax when I exercise a share option?

No. RTSO is payable within 30 days of an option being exercised and as it is outside the PAYE collection system the employee is responsible for making this payment to the Collector General.

What forms must I file with the Revenue Commissioners if I exercise a share option?

The employee must submit a Form RTSO 1 within 30 days from the date of exercise of the share option. A payment of Relevant Tax on Share Options must also accompany the submission. The relevant tax at 40% is calculated on the share option gain as well as universal social charge (USC) at 8% and PRSI at 4% (unless you have advance approval from Revenue to pay at a lower rate).

Employees liable to pay RTSO must then submit the usual self-assessment return, containing details of all share option gains in a tax year, by 31 October following the year in which the gains are realised. The income tax return must be filed for the relevant year in addition to the form RTSO1.

What happens if I decide to sell the shares?

An employee who acquires shares by the exercise of a share option is chargeable to capital gains tax (CGT) on any chargeable gain realised on the subsequent disposal of those shares.

An individual must file a return by 31 October in the year after the date of disposal. A return is required even if no tax is due because of reliefs or losses. An individual must file a Form CG1 if not usually required to submit annual tax returns; Form 12 if a PAYE worker or a Form 11 if considered a chargeable person for tax purposes.

Please contact Michelle Mangan, Manager of Tax Services, if you require assistance with the above.