SAYE early exercise - can I avoid Income Tax?

[reaper]

Hi there, hope someone can help with my little problem as I have been scouring the web looking for answers with no definitive results!

Here's the problem:

My company has been taken over meaning that all three of my SAYE schemes taken out over the last two and a half years must be excercised before the 3-year maturation date. I see from the SAYE guidelines from HMRC that any profit I make on exercising my options early to buy shares will result in income that will be liable to income tax. Is there any way whatsoever that I can legally avoid the income tax (as a higher rate tax payer, I don't fancy losing 40% of my profit - if it is unavoidable, however, so be it!?

Incidentally, through choice, I will be leaving my current company to start work with a new company in two months' time. Does this make any difference?

I understand that putting the shares straight into a mini stocks and shares ISA will not allow me to avoid the income tax (the total will be within the £4k limit unless the share price rockets within the next few months!). I am married, so can I pass the shares onto my wife to avoid the tax?

Any advice gratefully received and many thanks for taking the time to read my lengthy query.

[N-Tax]

Hello

I can't answer all of your queries but only some of them.

With a SAYE scheme you enter into a contract for either: 3, 5, or 7 years. In this time you will be making regular deposits into a bank a/c. At the end of this period you can use this money to buy shares. If you have not reached the end of the contract period and you leave the company early, you can still contribute into your bank a/c but you will not be able to purchase the shares in the company.

If you have already reached the end of the contract period and exercised your option to purchase the shares there will be no income tax implications only CGT to consider.

Are you sure you have a SAYE scheme and not a SIPs scheme?

[reaper]

Hi N Roberts,

Many thanks for your reply.

In response, I confirm that it is definitely a SAYE scheme and yes I will be given the option to purchase shares before the contract period is up! This is a slightly unusual occurence but is apparently a perfectly normal procedure with SAYE schemes in takeover situations with PLCs. Since posting, I have contacted HMRC who have (gleefully?) informed me that the income tax on the gain is unavoidable.

Because the exercise of the option has been made within 3 years (even though this is beyond my control), the gain/profit is treated in the same way as any earned income and must be declared on the relevant supplementary sheet on my tax return. HMRC also confirmed that there was no way to legally avoid this via gift or direct transfer to an ISA.

Potentially even worse, if I keep hold of the shares, I will still have to pay the income tax within the tax year as the 'income' is treated as being 'earned' on the day the option to purchase shares is exercised. So, if the shares slump the second after puchasing them, I still pay income tax on the original gain!

Actually, the lady I spoke with agreed that it was somewhat unfair but the slight upside is that I will be getting the money early should I sell the shares immediately (though losing 40% of the profit is a bitter pill to swallow no matter how you try to sweeten it!).

Thanks again.

[N-Tax]

Hi Reaper,

Thank you for your reply it was very informative.

I note your last comments re: selling the shares immediately, this may be worth considering because any increase in value of the shares could also be subject to CGT.

[cv65user]

hi, can you tell me what happened in the end?

if you are in a scheme 1 out of 3 years and plc being bought out reverting back to ltd and you will be allowed to continue for 6 months to exercise my options.if you have been paying into saye as net so i dont understand why you would have to pay NI/income tax again. is it because if plc bought out the buying company will give me cash value straight away for the options therefore this is treated as taxable income?

nb.i understand the gain will be under the cgt of 11k. but its the income tax /ni i dont understand why you would have to pay again.