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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

Schedule 3 SAYE option schemes: Requirements relating to share options: Exercise rights: Other cessations of employment

If employment ceases for any reason other than the ‘involuntary’ reasons detailed in ETASSUM35370 and ETASSUM35340, at a time when the employee has held the option for more than three years, a savings-related scheme must provide that either:

  • the option lapses on cessation of employment,  or
  • the option can be exercised within six months of cessation.

The scheme rules must set out the circumstances in which options will or will not be capable of exercise when employment ceases other than for ‘involuntary’ reasons (e.g. on taking early retirement), at a time when the option has been held for more than three years (paragraph 34(3)). This requirement will be met if the rules provide a right to exercise or give no right to exercise, following cessation of employment ‘for any other reason’. The scheme should not leave any exercise to the discretion of the company at the time the employment ceases.

If employment ceases, within three years of the grant of the option, for any reason other than the ‘involuntary’ reasons detailed in ETASSUM35370 and ETASSUM35340, there will usually be no right to exercise early and the scheme will provide for the options to lapse immediately. The one exception is if employment ceases in circumstances covered by paragraph 34(5).

Paragraph 34(5) covers cessations of employment with a participating company which are caused by the transfer of the business in which the option-holder works to another person who is neither an associated company of the scheme company nor a company of which the scheme company has control and where the ‘TUPE’ Regulations do not apply, (See ETASSUM35400 where TUPE regulations do apply to the transfer of the business). 

A company can choose whether or not to include paragraph 34(5) early exercise provisions in its scheme, but if it does so it must set out in the scheme rules which of the alternative option exercise provisions is to apply. These are, broadly, exercise within six months of the termination date; or exercise within six months of leaving the ‘new’ company for a ‘good leaver’ reason. In these circumstances income tax will be chargeable if the option is exercised within three years of the date of grant (section 519).

The provisions of paragraph 34 and 37, and the taxation consequences for options exercised in accordance with them, are considered in more detail at onwards.