Beyond the neat hedgerows of EMI, CSOP, SIP and SAYE lies the open country of UK equity: unapproved options, growth shares, hurdle shares, restricted securities, sweet equity. Companies use these when the schemes won’t fit — too big, wrong trade, non-employee recipients, exhausted limits. The tax outcomes range from “nearly EMI” to “ouch”, decided almost entirely by structure and paperwork signed on day one. This is the field guide.
Unapproved options: the default wrapper
An unapproved (“non-tax-advantaged”) option is just a contract: the right to buy shares at a set price. No HMRC scheme conditions — and no shelter:
- Grant: no tax (for employees; non-employee advisers can differ).
- Exercise: the spread — market value minus exercise price — is employment income. If the shares are readily convertible (an exit in progress, a listed stock, arrangements to sell), it runs through PAYE with employee NI at 8%/2%; if genuinely illiquid, it lands on Self Assessment without NI.
- Sale: CGT on growth above the value already income-taxed; base cost = exercise price + taxed spread.
The sting is concentrated at exercise: a higher-rate taxpayer exercising into an exit can lose 40-47% of the spread before the cheque clears. Common mitigation is timing — exercising only at exit (cash arrives with the bill), or early exercise while the spread is small, ideally paired with the Section 431 election below.
Receiving actual shares: the entry price is the tax event
Where a company hands you shares (or sells them cheap) instead of options, income tax applies at acquisition on any undervalue: market value minus what you paid. That makes the share valuation the entire battlefield — and it’s why straightforward ordinary shares are usually only given when the company is young and nearly worthless, or with the engineering below.
Growth shares: engineering a low entry price
A growth share is a special class that participates only in value above a hurdle — say, above £10m when the company is worth £8m today, often plus a 10-40% premium for safety. Because the share is worthless unless the company grows past the hurdle, its current market value is small; you can acquire it for pennies with little or no income tax at entry. From there:
- All value created above the hurdle accrues to your shares and is taxed at CGT rates (18%/24%) on sale — no income tax, no NI on the growth;
- You are a real shareholder immediately (the CGT clock runs; dividends/votes per the class terms, often none);
- BADR is possible but only via the ordinary route — broadly 5% economic/voting tests and 2 years — which sizeable growth-share stakes sometimes do meet.
Hurdle mathematics
Company worth £8m sets a £10m hurdle. Mei subscribes for growth shares equal to 2% of value above the hurdle, paying £2,000 against a supportable valuation. Exit at £30m: her shares carry 2% × £20m = £400,000. Tax: CGT at 24% on ~£395,000 (after the £3,000 exempt amount) ≈ £95,300 — versus roughly £180,000+ had the same value arrived as employment income through an unapproved option. If the company instead sells for £9.5m, her shares expire worthless: the hurdle is the price of the structure.
Restricted securities and the 14-day election
Almost all private-company employee shares are restricted — leaver provisions, transfer locks — and restrictions depress value. UK rules respond with a trap: buy at the restricted (lower) value and a slice of every future gain can be re-characterised as employment income when restrictions lift or you sell. The standard defence is the Section 431 election, signed jointly with your employer within 14 days of acquisition: you elect to be taxed up front as if the shares were unrestricted (usually a small extra income amount), and in exchange all subsequent growth is capital. For growth shares and early exercises it is near-universal practice. Miss the window and it cannot be retrofitted — the 83(b) election’s British cousin, deadline and all.
Before you sign: seven questions
- Exactly what instrument is this — unapproved option, ordinary shares, growth shares, something hybrid?
- What valuation supports the exercise/subscription price, and who produced it?
- For growth shares: where is the hurdle relative to today’s value, and what premium was added?
- Will a Section 431 election be signed within 14 days? (If the answer is a blank look, escalate.)
- What are the leaver provisions — good/bad leaver definitions, compulsory transfer prices?
- When would exercise/acquisition tax actually be payable, and would NI apply (readily convertible)?
- What happens on exit — drag-along, cashless exercise, who withholds what?
Outside the schemes, the legislation gives you no default protection; the documents are the protection. Get the seven answers in writing, take advice on anything sizeable, and unscheme equity can still end its journey in the gentle land of capital gains.
Key takeaways
- Unapproved options are taxed at exercise: the spread is employment income, with NI too if the shares are readily convertible into cash.
- Growth shares are real shares that only participate in value above a 'hurdle'; set correctly, they cost little to acquire and convert future growth into CGT.
- Buying or receiving actual shares cheaply triggers income tax on any undervalue at acquisition — the entry price is the tax event.
- A Section 431 election (within 14 days of acquiring restricted shares) front-loads a small income-tax cost to keep all later growth in CGT.
- These instruments are flexible but unforgiving: valuation, hurdle level, leaver terms and election deadlines decide most of the outcome.
Frequently asked questions
Why would a company grant unapproved options at all?
Because the advantaged schemes exclude them or their people: non-employees (advisers, consultants), employees beyond EMI/CSOP limits, companies in excluded trades, overseas parents, or groups too large for EMI. Unapproved options are the everything-else bucket — fully legal, just without the tax wrapper.
When exactly do I pay National Insurance on an unapproved exercise?
When the shares are 'readily convertible assets' — broadly, when there's a market or arrangements to sell (an exit, a listed parent). Then PAYE and employee NI (8%/2%) apply at exercise. Private-company exercises with no market are usually income-taxed via Self Assessment without NI.
What does a Section 431 election actually do?
Restricted shares (leaver provisions, transfer restrictions) are valued lower because of those restrictions. Without the election, part of your later sale proceeds can be clawed back into income tax. Electing within 14 days means you pay income tax now as if the shares were unrestricted — often a tiny difference — and in exchange, all future growth is pure CGT.
Are growth shares risky for me?
The structure is sound when the hurdle is set above current value with a sensible premium and a robust valuation. Your risks are practical: the hurdle may never be cleared (shares worth nothing), leaver terms may strip you, and a weak valuation invites HMRC challenge on the entry price. The paperwork quality IS the product.
Educational disclaimer: This guide is general information, not financial, investment, tax or legal advice. Figures refer to the tax years stated and change over time; rules differ by jurisdiction and personal circumstances. Verify current figures with the IRS / HMRC and consult a qualified professional before acting. See our full disclaimer.