Share options may be granted a reprieve under tax amendments proposed at the committee stage of the Finance Bill. The new treatment applies to share options exercised on or after April 6th, 2000.

Under the proposals, a taxpayer will be entitled to make an "election" to defer the payment of income tax arising from the exercising of a share option until November 1st in the tax year following the tax year in which shares are disposed, says Mr Jim Ryan, director of personal tax at Ernst & Young. For example, if shares are acquired because of exercising a share option in the 2000/2001 tax year and they are sold in the 2002/2003 tax year, income tax is not payable until November 1st 2003 on the condition that an election has been made. Such an election must be made by January 31st after the tax year in which the option is exercised. However, payment of income tax cannot be deferred indefinitely, he says. If the shares have not been disposed of within seven years from the end of the tax year in which they were acquired, any outstanding tax must be paid by November 1st in the eighth tax year. For example, if shares were acquired in 2000/ 2001 and not sold before April 5th, 2007, the deferred income tax must be paid by November 1st, 2008.

The proposed legislation also treats an employee who exercises share options as a self-employed person for the purpose of tax assessment. "Therefore, if a completed tax return is not filed by January 31st after the end of the tax year in which a share option is exercised the employee becomes liable to a surcharge liability of up to 10 per cent of their tax liability," says Mr Ryan.

In addition to income tax being payable on the relevant date, capital gains may also be payable if the shares are sold at a profit, he said.

Under the current legislation, individuals pay 46 per cent (44 per cent as of April) when they exercise their options, even when they hold onto the actual shares. In many cases employees are forced to sell half their shares to meet the tax liability. The new rules would not trigger the tax liability until shares are actually sold.

Unfortunately, unless further changes are proposed share options will continue to be taxed as income (currently 46 per cent) rather than capital gains (currently 20 per cent) twice.