How to exercise share options

📘 Overview

Exercising share options means turning an agreed-right to acquire company shares into actual ownership. This guide walks you (the option holder) and the company through the process, from checking eligibility through to tax and reporting obligations. We’ll explain both parties’ responsibilities, highlight key deadlines and show you what to watch out for.

✅ Step 1: Check Eligibility to Exercise

Option holder, review the exercise conditions

Before doing anything else, you should check your option agreement (and any associated plan rules) to confirm you meet the exercise conditions. These typically include:

• A vesting period (you may need to remain employed for a set time)
• Performance targets (for example, hitting revenue or profit milestones)
• A trigger event, such as a sale of the company or an IPO

It’s important you understand exactly when you become eligible, to ensure the exercise is valid and correctly timed.

🔍 Step 2: Company review, Pre-emption rights

If the company’s articles or shareholder agreements include pre-emption rights, existing shareholders have the first right to buy new shares before they’re offered to others. The company must:

• Review its articles of association and shareholder agreement to see if pre-emption rights apply
• If they do apply, determine whether they must be waived or consented to before new shares can be issued to the option holder
• Obtain any required written shareholder consent

If this step is overlooked, the share issue might be delayed, or in worst-case invalid, so it’s key that the company handles it properly.

✅ Step 3: Option holder, Notify the company

Once you’ve satisfied the eligibility conditions, you must formally notify the company of your intention to exercise. The company may require a written exercise notice that includes details like:

• Number of options you’re exercising
• The price you’ll pay (if payment is required)
• The date of exercise

A clear written notice helps avoid misunderstandings and ensures the exercise is documented.

🔍 Step 4: Company review, Check the exercise timeframe

The rules differ depending on the type of option (tax-advantaged vs non-tax-advantaged). The company must confirm the option is still valid under its terms and under tax or statutory deadlines. Key points:

Note: Under the latest reporting rules, certain filings have changed (see Step 10).

✅ Step 5: Company review, Obtain board/shareholder approval if required

Depending on the company’s governance:

• Review the articles of association and shareholder agreements to check if board approval (or shareholder consent) is required before issuing shares under an option exercise.
• If required, the company should record the approval formally (e.g. in board minutes) before issuing shares. This ensures compliance with corporate governance and avoids potential challenges.

✅ Step 6: Option holder, Pay the exercise price

When you exercise the options, you’ll usually pay the exercise price (the per-share price defined in the option agreement). The process:

1. Transfer payment to the company in the manner set out in the option agreement.
2. The company confirms receipt of payment and records that payment in its accounting system.
3. The company allocates the correct number of shares to you. Timely payment ensures the shares can be issued smoothly and registered appropriately.

✅ Step 7: Option holder, Sign the shareholder agreement (if required)

When you exercise and become a shareholder, you may need to sign a Deed of Adherence to the existing shareholder agreement. This document ensures you accept the same rights and obligations as other shareholders. Without it:

• You might not be fully integrated into the governance regime of the company.
• Your rights or protections as a shareholder may be unclear. So check whether this step is required in your situation.

✅ Step 8: Company, Issue and register the shares

After payment and appropriate approvals:

• The company issues the shares in your name.
• It updates the register of members (as required under company law).
• It may issue a share certificate (or equivalent electronic confirmation). Additionally:
• The company must check if the shares belong to a new share class and, if so, confirm the articles permit such a class.
• The company should ensure the issuance complies with pre-emption waiver or consent requirements (see Step 2). This step completes your transition from “option holder” to “shareholder”.

📊 Step 9: Tax implications for the option holder

For EMI options

• If the exercise price is at least the market value of the shares at the grant date: no Income Tax or National Insurance Contributions (NICs) are due on exercise.
• If the exercise price is below market value at grant: the difference is subject to Income Tax.

For unapproved (non-tax-advantaged) options

• Income Tax is generally due on the difference between the exercise price and the market value at exercise.
• If the shares are readily convertible assets (RCAs) (for example, if the company is about to be sold): NICs may apply, increasing the tax cost.

Section 431 election (s 431)

A s 431 election allows you and the company to ignore restrictions on shares for tax purposes. Key benefits:

• Taxed on the unrestricted market value (UMV) at acquisition, rather than later when restrictions lift and value may have increased.
• Prevents an unexpected “dry” Income Tax charge when restrictions lift.
• Ensures subsequent gains are taxed under Capital Gains Tax (CGT), which is usually at lower rates. For the election to be valid:
• The signed election must be submitted within 14 days of acquiring the shares.

💡 Recent update: In the case of Business Asset Disposal Relief (BADR) (previously Entrepreneurs’ Relief), the rate increased from 10% to 14% from 6 April 2025 for qualifying disposals.

So if you acquired shares under EMI and later sell them and qualify for BADR, this change may affect your planning.

✅ Step 10: Company, Reporting to HMRC

One of the most common compliance-errors relates to the company’s reporting obligations to HM Revenue & Customs (HMRC). Important updates:

• For the 2024-25 tax year (ending 5 April 2025), the company must file the Employment Related Securities (ERS) annual return by 6 July 2025.
• For options granted under an EMI scheme on or after 6 April 2024, the separate EMI notification to HMRC must also be filed by 6 July following the tax year (rather than the previous deadline of 92 days after grant).
• Even if no events occurred (no options granted, no exercises) a nil return is still required for each active scheme until it is formally closed.
• Late filing can trigger automatic penalties (from £100 and upwards) and may jeopardise tax reliefs.

💡 Key Practical Points

• Always review your option agreement and plan rules before exercising check vesting, performance criteria and trigger events.
• If the company’s articles or shareholder agreements include pre-emption rights, ensure they are properly dealt with before issuance.
• The tax-advantaged status of EMI options can be lost if deadlines (such as the 90-day post-leaving window) are missed.
• If you’re an option holder, consider whether a Section 431 election may reduce your future tax bill.
• Companies must be mindful of 6 July reporting deadlines (ERS annual return and EMI notifications), missing them may lead to penalties and loss of tax benefits.
• Keep clear records of payments, board approvals, notices and share issue documentation, robust documentation helps in due diligence, especially on sale.
• If the company is approaching a sale or restructuring, review whether the company meets the independence requirement under EMI rules (new guidance from HMRC).