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BIM44413 | Specific deductions: employee share schemes: providing shares to employees: qualifying shares: net settled examples

From HM Revenue & Customs · Business Income Manual

When looking at the deduction available for net settled share options you also need to consider both the SBP expense and the amount chargeable under ITEPA 2003 in a similar way as cash cancelled options (BIM44412). However the SBP expense recognised in these cases will relate to both the shares acquired and those retained by the employer to meet the tax and NICs liabilities (the net settled element) so the SBP expense should be apportioned into:

  • the amount relating to the shares acquired, on which Part 12 relief has been claimed and for which S1038 denies another deduction and

  • the amount relating to the shares not acquired for which S1038A(7) prevents S1038A from denying a deduction

The amount subject to a charge under ITEPA 2003 should be apportioned into:

  • the amount charged in respect of the shares which were acquired

  • the amount charged in respect of the shares which were not acquired

The amount calculated in respect of the shares not acquired should be further restricted so that it is not more than the difference between the Part 12 deduction taken in respect of the shares acquired and the total amount subject to the charge under ITEPA 2003.

The maximum deduction allowed in the period of the Net Settlement will be the lower of:

  • the amount of the SBP expense recognised in the period which relates to the shares not acquired or

  • the amount calculated as that on which the employee is subject to a charge under ITEPA in respect of the shares not acquired

It may be possible to amend earlier years and take a deduction for the amount of the SBP expense recognised in the period which relate to the Net Settled options. However, the maximum cumulative relief available for the Net Settled option for all available periods will always be the lower of:

  • the total amount recognised as SBP expenses over the vesting period, in relation to the shares not acquired under the options which have been Net Settled

  • the amount on which the employee is subject to a charge under ITEPA in respect of the shares not acquired

Example 1: Apportionment

The apportionment for the SBP expense and the amount charged under ITEPA must be made on a fair and reasonable basis. An example of a fair and reasonable apportionment is:

  • a share option is granted over 1000 shares

  • on exercise, 580 shares are acquired and 420 shares are retained for the net settlement

A fair apportionment would be for 42% of the SBP expense to be considered available in calculating the deduction.

Example 2: deduction allowable for a net settled option

An employee exercises an option over 1000 shares with a value of £2 per share and an exercise price of £0.50 per share.

The employee has a total ITEPA 2003 liability on an amount of £1,500, which is based on the value of whole of the option settled including the shares not acquired.

By their own calculations, the employer needs to retain 420 shares in order to settle the ITEPA liability on the £1,500 and the employee acquires 580 shares.

The fair value at grant was £2000 and a SBP expense of £400 is recognised in the period the option was exercised, which relates to both the shares acquired and the shares not acquired.

Making a fair apportionment as set out in example 1, the amount of the SBP expense available for a deduction in respect of the shares not acquired would be £400 x 42% = £168.

Similarly, the amount subject to a charge under ITEPA in respect of the shares not acquired would be £1,500 x 42% = £630.

Using these apportionments, the amount allowed as a deduction would be £168, which is the lower of:

  • the amount of the SBP expense recognised in the period the option was exercised in respect of the shares not acquired of £168 and

  • the amount subject to an ITEPA charge in respect of the shares not acquired of £630

If SBP expenses in earlier periods are available for deductions to be taken, the total deduction would be capped at £630, being the lower of the apportioned total SBP expense recognised over vesting period and the apportioned amount subject to a charge under ITEPA.