Income Tax (Earnings and Pensions) Act 2003 section 554Z7

Exercise price of share options

Section 554Z7 allows a reduction in the taxable value of a relevant step where the employee is required to pay an exercise price to acquire shares (or receive a cash equivalent) under an employee share option scheme operated by their employer.

• Where shares are earmarked under an employer's share scheme and the employee must pay an exercise price to acquire them, that exercise price can be deducted from the taxable value of the relevant step, reducing the income tax charge
• The deduction cannot reduce the taxable value below nil, and if a residence-based reduction has already been applied, the exercise price deduction is proportionately scaled down to match
• Strict conditions must be met: the earmarked shares must not exceed the number reasonably needed for the option, and there must be no connection with any tax avoidance arrangement
• If an expected share option grant does not materialise within three months, or if earmarked shares are subsequently held for a different purpose, a new taxable relevant step is deemed to have occurred