Share options and RSUs in a settlement agreement

Do I lose my unvested RSUs if I leave under a settlement agreement?

Usually yes for anything genuinely unvested at your termination date, unless the plan rules classify you as a good leaver, such as on redundancy, ill health or retirement, in which case some or all unvested units may continue to vest on the original schedule or vest immediately. Whether an award lapses or survives is set by the plan rules and your leaver category, not by statute and not by the settlement agreement in isolation; tax law, principally Part 7 of ITEPA 2003, only determines how anything you do keep or exercise is taxed.

Check the underlying plan document rather than assuming a default outcome either way. The settlement agreement can record what the employer has agreed for your specific awards, for example confirming good leaver status or extending an exercise window, but it generally cannot override the rules of a plan operated by a separate trustee or administrator who is not a party to the agreement.

Good leaver vs bad leaver: why the label matters

Most option and RSU plans define "good leaver" and "bad leaver" categories that determine what happens to unvested and, sometimes, vested-but-unexercised awards. Good leaver reasons commonly include redundancy, ill health, retirement and death; bad leaver reasons commonly include resignation and dismissal for misconduct, though the exact definitions vary considerably between plans and are set by the company, not by statute. Being made redundant does not automatically mean good leaver status under every scheme, and some plans leave the classification to board or committee discretion even in a redundancy. Read the actual scheme rules, or have them checked, before assuming which category applies to you: this is frequently the single biggest driver of what equity is actually worth keeping.

Separately from leaver status, most plans give a leaver only a limited window to exercise vested options after termination, often 90 days and sometimes less, and options not exercised within that window normally lapse entirely, whatever the settlement agreement says. That deadline applies to unapproved options and CSOP options just as much as EMI: the EMI 90-day rule below is about preserving tax treatment, but the plan's own post-termination exercise deadline decides whether you keep the option at all. Diarise it from your actual termination date and, if it is tight, ask for an extension to be recorded in the settlement agreement before you sign.

What is the EMI 90-day exercise window?

Enterprise Management Incentive (EMI) options are a tax-advantaged UK option scheme. Ceasing to be an employee of the company is treated as a "disqualifying event" for EMI purposes. From that date you generally have 90 days to exercise any vested EMI options while retaining the beneficial EMI tax treatment on the gain built up to that point; exercising after the 90 days has passed usually means the growth in value since grant is taxed less favourably, though the option itself may remain exercisable under the plan rules on those less favourable terms. Because the clock starts running from your actual leaving date, the termination date agreed in your settlement agreement can directly affect how much time you have, which makes it worth checking alongside your notice period rather than treating the two as unrelated.

Sharesave and SIP on leaving

Save As You Earn (Sharesave) and Share Incentive Plans (SIP) are separate HMRC-approved schemes with their own leaver rules, generally more favourable than discretionary option or RSU plans because they are designed around regular saving rather than performance incentives. Leaving employment usually lets you either exercise Sharesave options within a set period using savings already made, or withdraw the savings in cash, and SIP shares already allocated to you are normally released, sometimes with early withdrawal reducing the available tax relief depending on how long the shares have been held. The precise mechanics and deadlines are set by the specific scheme rules, which your employer or the scheme administrator can confirm.

Are share option gains taxed as income or capital gains?

Generally as employment income, subject to PAYE and National Insurance, at the point an option is exercised or an RSU vests, not as a capital gain. Only further growth in value between that point and an eventual sale of the shares is normally within the capital gains regime. Tax-advantaged schemes such as EMI, CSOP and SIP can qualify the initial gain for more favourable treatment if the relevant conditions are met, but the default position for an ordinary option or RSU is income tax on exercise or vesting.

The termination-payment exemption in sections 401 to 403 of ITEPA 2003, worth up to £30,000, applies only to genuine compensation for loss of employment. It does not extend to option or RSU gains, which are taxed under the separate employment-income rules that apply to equity awards regardless of when they happen to fall relative to your termination date. See our tax guide for how the £30,000 exemption works on the rest of your settlement. This guide explains how equity awards interact with a settlement agreement; we do not advise on tax, and the precise tax position for your specific scheme should be checked with an accountant before you sign.

Equity clauses: what to ask for

Work through each equity-related item separately: some are simply owed to you regardless of the settlement agreement, others turn on discretion the plan gives the company and are genuinely worth negotiating.

Worked example: structure, not figures

A typical equity review on a settlement agreement follows this order: (1) identify every award you hold, vested and unvested, across each scheme type (EMI, CSOP, RSU, Sharesave, SIP), since each has different rules; (2) check the plan's good leaver / bad leaver definitions against your actual reason for leaving; (3) for EMI options, confirm the exact disqualifying-event date and count the 90-day exercise window from it; (4) check whether the settlement agreement's termination date affects any of the above, and whether a short adjustment to that date is worth requesting; (5) get written confirmation of what will vest, what will lapse, and any exercise deadlines, rather than relying on a general assurance. We do not quote a value here because it depends entirely on the scheme rules, the share price and the tax treatment that applies to your specific awards.

Share options and RSUs: frequently asked questions