| Financial Benefits to Encourage Employee Participation |
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These rules do not prevent substantial gains being made when options are given in the run-up to the flotation of a private company since the value of the share will rise following flotation as there is now a market for the shares.90 In the light of this, companies often allow employees to have options tied to the post-flotation price. |
The predecessor of section 476 (section 135) was held to be an independent charging section and therefore applied whether or not the benefit of the option can be converted into cash.91 It was also applied to the exclusion of what is now part 3 section 62.92 Section 476 does not apply in certain international situations.93 |
The effect of section 476 has been to make share option schemes unattractive in tax terms outside the approved schemes. The company receives money when the option is exercised, but not as much as on a sale to the public at that time. Although E will not normally have to pay tax until the exercise of the (not long-term) option, the gain on the exercise of the option is treated as E’s income under section 135. Moreover, E may have to sell some of the shares to raise the money to pay the tax. The scheme also involves some dilution of equity. One variant scheme addresses these issues: on the exercise of the option, the company pays money to a trust, which they buy shares for E and transfers them to E. This does not avoid 476 (section 135) but, since only the net-of-tax sum is invested, it avoids any need to sell shares and reduces equity dilution. As has already been stressed the better way of avoiding section 476 is to take advantage of the statutorily approved exceptions to that section (see ITEPA, chapters 7, 8 and 9). |