Before we answer whether there is a stock options tax, let\u2019s first talk about what the heck stock options are – and how they work in the context of a startup. <\/p>\n\n\n\n
You\u2019ve probably heard the term stocks and shares loosely thrown around to describe an array of different financial activities. Options are part of that world of financial investment. But there\u2019s an important difference between owning shares and owning stock options. <\/p>\n\n\n<\/div> \n\n
If you buy shares in a company, you automatically become a shareholder. You own a part of that company.<\/p>\n\n <\/div>\n <\/div>\n <\/div>\n\n \n \n
If you buy options in a company, you have the right to buy a share of that company in the future at a preset time and price.<\/p>\n\n <\/div>\n <\/div>\n <\/div>\n\n \n \n <\/div>\n<\/div> \n\n
In the \ud83c\udf0e\u00a0 of finance, an option is what\u2019s known as a derivative – its value comes from (or is derived by) an underlying asset. Still with us? In the case of a startup, an option\u2019s value comes from the shares of the company\u2019s stock i.e. the value of the company.<\/p>\n
And if you work for a startup, you may have been offered what\u2019s known as Employee Stock Options (ESO). These are a little different.<\/p>\n\n <\/div>\n<\/div> \n\n
Employee Stock Options are offered to lots of startup employees as a type of equity compensation. They\u2019re often part of the benefit package when you join a company. As someone with ESOs, you have the option to buy the company stock at a set point in the future and for a set price. <\/p>\n\n\n\n
The main benefit of being compensated with an ESO comes if\/when the company (and so the stock) grows in value. If this happens, you\u2019re able to buy the stock at a significant discount compared to other investors at that time. <\/p>\n\n\n\n
In short, yes. (Sob.) <\/p>\n\n\n\n
First things first, what does it mean to exercise stock options? The exercise price is basically the discounted price that you\u2019ve agreed with the employer to buy the stock. When you exercise, you buy the stock you optioned at the agreed discounted rate. But you (normally) won\u2019t pay Income Tax or National Insurance on the difference between the exercise price and current value of the stocks. Hurray!<\/p>\n\n\n\n
This is because ESOs are often offered through certain tax-efficient schemes. Take a look \ud83d\udc47 <\/p>\n\n\n\n
The only tax you may have to pay is Capital Gains Tax, but this is only when you sell up and if your profit is more than the \u00a33,000 CGT allowance. Read more on Capital Gains Tax liabilities via HMRC online<\/a>.<\/p>\n\n\n\n