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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

HM Revenue & Customs
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Schedule 3 SAYE option schemes: Requirements relating to share options – The exercise price: Market value (MV) of shares

The option exercise price must not be manifestly less than 80% of the market value of shares of the same class at:

  • the time the option is granted, or
  • at such earlier time or times as may be agreed in writing by HMRC.

Scheme rules may, of course, provide scope for options to be granted at a price greater than the permitted minimum. For example schemes may provide that options should not be granted at any discount to the market value of the shares. 

Market value is defined in paragraph 48(1) Schedule 3 ITEPA as having the same meaning as in Part VIII Taxation of Chargeable Gains Act (TCGA) 1992:

  • for shares included in The London Stock Exchange Daily Official List, (or on any recognised stock exchange see ETASSUM35160) there are specific provisions in Section 272(3) TCGA for determining market values – (see ETASSUM35140).
  • for other shares, the general definition of market value in Section 272(1) TCGA applies. This defines the market value as the price those shares might reasonably be expected to fetch on a sale in the open market (see ETASSUM35150).

It is important for companies to be sure that the value by reference to which they are granting options is accepted by HMRC as the market value. Agreement with SAV should be sought unless the shares are listed on a recognised stock exchange and the market value has been determined as the price, which the shares might reasonably be expected to fetch on the open market. If an option is granted with an exercise price less than (the relevant percentage of) the market value, it is manifestly less than that value, and will not have been granted in accordance with the terms of the  scheme.

ETASSUM35200 provides some general principles on the valuation of shares (including agreements in writing – paragraph 28(2)).