This guidance has been replaced by the guidance contained in the Employee Share Schemes User Manual (ESSUM). Please see the ESSUM for further information about EMI.
This guidance aims to take you through the qualifying requirements for Enterprise Management Incentives (EMIs). It is divided into sections which explain each part of the legislation contained in Schedule 5 Income Tax (Earnings and Pensions) Act 2003. Detailed points are covered in a question and answer context. It also explains some key terms used.
Unless otherwise stated, the statutory references in this guidance are to the Income Tax (Earnings and Pensions) Act 2003, and the abbreviations ITEPA 2003 and Sch 5 have been used throughout.
Remember that if you grant EMI options you may also have to consider other laws and rules. For example, there may be company law and regulatory requirements to comply with. Such matters are not covered in this guide so you should consider whether you need to take relevant professional advice.
The information contained here is for guidance only. EMI options must at all times comply with the provisions of Schedule 5 ITEPA 2003.
EMIs are tax advantaged share options. They are designed to help small, higher risk companies recruit and retain employees who have the skills to help them grow and succeed. They are also a way of rewarding employees for taking a risk by investing their time and skills to help small companies achieve their potential.
Tax advantaged share options with a market value of up to £250,000 from 16 June 2012 (£120,000 prior to 16 June 2012) may be granted to a qualifying employee of a qualifying company, subject to a total share value of £3 million under EMI options to all employees.
The shares must be in an independent trading company that has gross assets of no more than £30 million.
The grant of the option is tax-free and there will normally be no tax or National Insurance contributions for the employee to pay when the option is exercised. There will normally be no National Insurance contributions charge for the employer.
The employer must notify Her Majesty's Revenue & Customs (HMRC) of an award of EMI options within 92 days of the grant of the option.
Throughout this guidance all references to employer are to the employing company.
For companies to qualify they must have maximum gross assets of no more than £30 million; for groups, this applies to the assets of the group as a whole. The company whose shares are the subject of the option must be independent, and the company or group must be trading. Companies carrying on certain trades will not qualify.
There is more detail on qualifying companies.
If an option is to qualify for tax relief:
To qualify for EMI an employee has to be employed by the company whose shares are the subject of the option, or by a subsidiary. An employee must spend at least 25 hours a week working for the company or the group. If his hours are shorter, he must spend at least 75 per cent of his working time working as an employee for the company or group.
There are more details on employee eligibility.
This section outlines the main requirements for options to qualify under EMI, they are:
The options must be granted for commercial reasons to recruit or retain employees in a company, and not as part of an arrangement, one of the main purposes of which is to avoid tax. (Para 4 Sch 5).
If the option is granted to recruit or retain employees the purpose test is met. This will depend on the facts and all the circumstances.
No employee may hold unexercised qualifying EMI Options with market value of more than £250,000 from 16 June 2012 (£120,000 prior to 16 June 2012). The market value is taken at the date of grant. The value to be used is the unrestricted market value, that is, the value of shares under option without taking into account any restrictions or the risk of forfeiture
If an option granted to an employee causes the £120,000 limit to be exceeded, the excess will not qualify as an EMI option.
Yes. Once an employee has been granted EMI, or EMI and Company Share Option Plan (CSOP) options up to the £250,000 from 16 June 2012 (£120,000 prior to 16 June 2012) limit, he must wait until three years after the last of these options was granted before he can be granted any EMI qualifying options, even if he has exercised or released some of the options. He can then be granted further EMI options to the extent that any other EMI or CSOP options then held by him are below the £250,000 limit. (Para 6 Sch 5)
The market value of any shares for this purpose is the price they might reasonably be expected to fetch on the open market, free from any restrictions or risk of forfeiture to which they may be subject.
If the shares under option are quoted on the London Stock Exchange, the market value is based on the prices on the Stock Exchange’s Daily Official List. If shares are not quoted on the London Stock Exchange, the company may offer its own valuation. In that case, HMRC may enquire into the valuation.
Alternatively, the company can ask HMRC Shares and Assets Valuation (SAV) to agree a valuation with them before the option is granted or whenever a valuation is required. Companies, or advisers, may find this helpful.
No. Performance conditions are not taken into account when determining the market value of the shares under option.
No. Any number of employees may hold EMI options in a company or group, subject to a maximum of £3 million as the total value of shares under EMI option in a company.
This section sets out the conditions a company has to meet to qualify for EMI, they are:
The requirements that companies have to meet for options to qualify under EMI are similar to the requirements for the Enterprise Investment Scheme, the Corporate Venturing Scheme and Venture Capital Trusts. However, both quoted and unquoted companies can qualify for EMI.
A company whose shares are subject to EMI options must not be:
Arrangements must not exist which could result in the company becoming a 51 per cent subsidiary or otherwise being controlled. (Para 9 Sch 5)
Control in this context means the power of one company to ensure that the affairs of another company whose shares are subject to EMI option are conducted in accordance with that company’s wishes. This may be through share ownership, voting power, or because of any powers conferred by Articles of Association or other document.
For options granted before 17 March 2004, all of a company’s subsidiaries must be qualifying subsidiaries. That is, the company whose shares are subject to EMI options must:
No other person must be able to control the subsidiary (control having the same meaning as it has for the independence requirement.)
There must be no arrangements in existence by virtue of which any of these conditions would cease to be met.
If a subsidiary company itself has subsidiaries, shares will not qualify to be used in an EMI option unless all these subsidiaries are also qualifying subsidiaries, as defined above.
Company A has a 75 per cent shareholding in subsidiary company B, and the same per cent rights to votes, assets and income. Company B is therefore a qualifying subsidiary.
Company B has a 75 per cent shareholding in subsidiary company C, and the same per cent rights to votes, assets and income. Company C it also therefore a qualifying subsidiary.
Company A meets the EMI requirements in relation to its subsidiaries.
Company X has a 75 per cent shareholding in subsidiary company Y, and the same per cent rights to votes, assets and income. Company Y is therefore a qualifying subsidiary.
Company X also has a 60 per cent shareholding in subsidiary company Z, and the same per cent rights to votes, assets and income. Company Z is not a qualifying subsidiary.
Company X therefore fails to meets the EMI requirements, as not all of its subsidiaries are qualifying subsidiaries.
For options granted on or after 17 March 2004 all of a company’s subsidiaries must be qualifying subsidiaries. That is, the company whose shares are subject to EMI options must hold, directly or indirectly, more than 50 per cent of the share capital of the subsidiary. (Para 11(2) Sch 5).
No other person must be able to control the subsidiary (control having the same meaning as it has for the independence requirement.)
There must be no arrangements in existence by virtue of which any of these conditions would cease to be met.
There is a further requirement if the company has subsidiaries that manage property.
For options granted on or after 17 March 2004, a company will not qualify if it has a property managing subsidiary which is not a 90 per cent subsidiary of the company. (Para 11A(1) Sch 5).
A property managing company is one whose business consists wholly or mainly in the holding of managing of land, buildings or interest in land.
To be a qualifying property managing subsidiary, the company whose shares are subject to EMI options must:
No other person must be able to control the subsidiary (control having the same meaning as it has for the independence requirement.)
There must be no arrangements in existence by virtue of which any of these conditions would cease to be met.
The value of the company’s gross assets must not exceed £30 million at the date the EMI option is granted. If the company is a member of a group of companies, the limits are applied to the gross assets of the group as a whole.
HMRC Statement of Practice SP2/00 outlines how to do this. For further information see Press Release PR133/00 'More certainty for companies using corporate venturing'
From 21 July 2008, there is a requirement that a company has to have fewer than 250 employees in order to grant EMI options. A qualifying company must have fewer than 250 full time-equivalent employees at the date on which an option is granted. The number of employees requirement applies to employees of the company and all its qualifying subsidiaries, whether or not they are based in the UK. Directors are counted as employees for the purpose of this test, but apprentices, students on vocational training, and employees on maternity or paternity leave at the time an option is granted are not to be counted.
HMRC regard a full-time employee as someone whose standard working week
(excluding lunch breaks and overtime) is at least 35 hours. Any employee
who worked longer than those hours would still only count as one full-time
employee. Where there are part-time employees their full-time equivalence
can be calculated on any 'just and reasonable' basis. For example, someone
working 21 hours a week would be expected to count as 60 per cent of a full-time
employee. Someone working 'one week on, one week off' would count as 50 per
cent, while the proportion of an employee working in term times only would
depend on the length of those terms in relation to the year as a whole.
Options granted before 21 July 2008 are not affected by this. If a qualifying
EMI option was granted before that date by a company with 250 or more full-time
equivalent employees, the option remains a qualifying option, but the company
cannot grant any more EMI options.
A qualifying trade is a trade carried on wholly or mainly in the UK on a commercial, profit making basis, and which does not, to any substantial extent, include certain excluded trading activities, listed later in this section.
Carrying on research and development from which a qualifying trade will be derived, or benefit, is treated as carrying on a qualifying trade (but preparing to carry on research and development does not count as preparing to carry on a qualifying trade). The derived or benefiting trade must be carried on by the same company, or by another company in the same group.
Research and development means activities that are treated as research and development in accordance with normal accounting practice, but excludes oil and gas exploration or appraisal.
If a company is not a member of a group it must exist (apart from any incidental purposes) wholly for the purpose of carrying on one or more qualifying trades. It must also be either:
Holding and managing property used by the company, and holding shares to which investment relief is attributable, if this is not a substantial part of the company’s business, are disregarded. (Para 13 Sch 5)
Where the company is the parent of a group, the business of the group must not consist to any substantial extent of carrying on activities other than qualifying activities. At least one company in the group must meet the same conditions as those described for the single companies. (Para 14 Sch 5).
The business of the group means all the activities of the companies in the group taken together.
In determining whether a group company exists for the required purpose, the following intra-group activities are disregarded:
A trade will not qualify if one or more excluded activities together amount to a substantial part of it. Excluded trading activities (in Paras 16–23 Sch 5) are:
Two exceptions to the excluded activities are:
The trade or activity must be carried on wholly or mainly in the UK.
HMRC Statement of Practice SP3/00 sets out how this is done. For more information see Press Release PR133/00 'More certainty for companies using corporate venturing'.
No. There are no residence or incorporation conditions.
Whether particular activities amount to a substantial part of a company’s trade, or the business of a group, is made on the basis of the facts and circumstances of that case. But, it is generally considered that activities amounting to more than 20 per cent of the trade form a substantial part of the whole.
Where a company is in administration or receivership, it is not regarded as ceasing to meet the trading activities requirements because of actions taken as a consequence of this. This is subject to the actions being taken for commercial reasons, not as part of a scheme of arrangement for the avoidance of tax.
Yes. A company receiving royalties and licence fees from computer software developed by it, or other companies in its group, can qualify if it meets the other requirements of Schedule 5.
It will depend on the facts. A company may qualify if the licence fees or royalties it receives are attributable to its software, rather than a third party’s, and if the company created at least half of its software in terms of value.
The activity is not an excluded activity if the type of know-how would be treated as an intangible asset under normal accounting practice. The exception is not restricted to industrial know-how.
Before options are granted, the company secretary, a director, or an agent acting on the company’s behalf may submit details of the company in writing to the Small Company Enterprise Centre (SCEC).
If the SCEC is satisfied, on the basis of the information supplied, that the company will be a qualifying company once the options are granted, it will say so in writing. However, whether the requirements for qualification will, in the event, be met is a question of fact, which cannot be known for certain in advance.
The SCEC can only give an advance assurance about whether the company will meet the qualifying requirements. It cannot give any assurance about other aspects of EMI, such as, whether an individual is an eligible employee.
The company should supply all the information that may be relevant, unless it has already been provided to HMRC, including:
This section sets out the conditions an employee has to meet to qualify for EMI, they are:
Individuals are only eligible for EMI options if they are employees of the company whose shares are the subject of the options, or, in the case of a group, employees of any qualifying subsidiary of that company.
The term employment includes:
Employee has a corresponding meaning.
Directors are classed as employees of a company, and so as long as directors meet the criteria set out for employees they will also qualify for EMI.
Employees are eligible for EMI options only if they are required to spend:
working as an employee for the company whose shares are subject to the EMI option, or for a qualifying subsidiary.
To check if employees meet the 75 per cent requirement their total working time needs to be established. They need to take into account all their remunerative work. This includes employment and any self employment, for example, as a consultant. They then need to check whether their work as an employee for the EMI company or group amounts to 75 per cent of this time. (Para 27 Sch 5).
A works as an employee of the EMI company for 16 hours a week so he does not meet the 25 hours requirement. He also works as a consultant for 5 hours per week. He does no other paid work. His total working time amounts to 21 hours a week. As 76 per cent of your working time is for the EMI company, he meets the 75 per cent requirement and will qualify the grant of an EMI option.
B works as an employee of the EMI company for 20 hours a week so she does not meet the 25 hours requirement. She also works as a self-employed engineer for 10 hours per week. She does no other paid work. Her total working time amounts to 30 hours a week. Only 66 per cent of her working time is for the EMI company, so she will not qualify for the grant of an EMI option.
In calculating the total working time, any time on sick leave, annual leave, maternity, paternity or parental leave needs to be taken into account.
If employees do not work as much time as they had planned to do and this brings them below the commitment of 25 hours each week, or 75 per cent of their working time, they are disqualified from holding an EMI option.
Ceasing to satisfy the working hours requirement is a disqualifying event and the tax treatment of an existing option will be affected.
No. An employee must simply fulfil the working time commitment and no material interest condition, but if he is not subject to UK tax there will be no relief.
An employee is not eligible if he has a material interest in the company whose shares are under option, or, if that company is a parent company, in any group company. A material interest is either:
An employee has a material interest if:
For the purposes of the material interest tests, associate means:
Settlement here means a trust. Settlor means the person who provided funds for the trust. (Section 20 ITTOIA 2005).
For EMI, associate does not include the trustees of:
The trustees of an employee benefit trust (EBT) are not treated as associates unless the employee, together with his associates except for the trustees of the EBT, has had a material interest in the company at any time since 13 March 1989. This applies if the EBT is a qualifying EBT in accordance with S550 ITEPA 2003.
This does not affect the existing EMI option the employee holds, but he will not be eligible for the grant of any more EMI options.
All shares over which the employee has an option have to be taken into account, except shares that are under EMI option.
This section outlines the conditions an option has to meet to qualify for EMI:
The option must be a right to acquire shares that are part of the ordinary share capital of the company, and
Shares are not fully paid up if there is any arrangement to pay cash for them at a future date.
Shares are redeemable if they are to be redeemed for cash. Some shares are redeemed at pre-determined dates or events. There may also be conditions that allow shares to be redeemed at the request of the company or the shareholder.
It must be possible for the option to be exercised within ten years of the date of grant, but it does not have to be exercised within that period. For example, if the exercise of the option depends on the fulfilment of performance conditions, it must be possible to do that within ten years.
However, the option agreement does not have to prevent the employee from exercising the option after that time. If the employee does exercise the option more than ten years after the date of grant, there will be no tax relief under Schedule 5 on the exercise. The tax relief on grant will be unchanged.
Yes. For example, an option over 1,000 shares can be exercised in tranches of 200 shares on each anniversary of the grant’s date, allowing a full exercise of the option on the fifth anniversary.
The option must be in the form of a written agreement between the person granting the option and the employee. The agreement must be retained by the company so that it can be inspected by HMRC if an enquiry is opened into the option.
The agreement must state:
Yes, providing the conditions of Schedule 5 are met. The company can decide to set up a new share scheme for EMI, or use an established scheme. It can grant an EMI option on the back of a scheme that has been set up to grant options under a HMRC approved Company Share Option Plan (CSOP). However, it is not essential for EMI options to be granted as part of a scheme, as each EMI option may be an individual agreement.
If EMI options are granted pursuant to a scheme, the relevant parts of the scheme rules must be either:
The option agreement must contain details of any:
The option agreement can set out these details in the text of the option agreement itself. Alternatively, the details, which may be contained in another document, can be attached to the agreement itself and incorporated into the agreement by reference to the document. Examples of other documents include:
In order to incorporate such details, the option agreement may say, for example, 'these shares are subject to restrictions /a risk of forfeiture set out in the company’s Articles of Association adopted on…'.
Where the details are included by reference to a separate document, the option agreement will need to specify
The option can be granted under deed or seal. In this case a separate written agreement to the terms of the option will need to be signed by the option holder. This document must contain the conditions set out above.
Whether any changes amount to a new option is a question of fact and degree. Minor alterations that do not affect the terms of the option and do not increase the market value of the shares that may be acquired, and are not contrary to the requirements of Schedule 5 will generally be acceptable. The date of grant of the option will remain unchanged.
However it will be a disqualifying event if the changes are a variation in the terms of the option and they increase the value of the shares that may be acquired under the option, or result in the conditions of Schedule 5 no longer being met (S536(1) ITEPA 2003).
If the changes amount to a new option, the existing EMI option is released. Any consideration for the release will be chargeable to Income Tax under Section 477 ITEPA 2003. It will be possible for the option to be rolled over into another EMI option, but only if the company and employee continue to qualify for the relief.
The option holder may have the right to choose not to exercise the option and acquire shares, and instead receive a cash payment for the difference between exercise price and the market value of the shares. This type of arrangement is often known as a 'cash cancellation payment'. If the employee accepts a 'cash cancellation payment' rather than exercising the option, there will be no relief under Schedule 5 and the full amount of a cash cancellation payment will be taxable as employment income. The employer is then required to operate PAYE and account for National Insurance contributions.
Yes. The agreement must set out the performance conditions. (Para 37(3) Sch 5) There are no requirements in Schedule 5 about the type of performance conditions that can be imposed or whether such conditions must be objective.
If the exercise of the option is dependant on the fulfilment of performance conditions, those conditions must be capable of being fulfilled within the period of ten years beginning with the date on which the option is granted. (Para 36(2) Sch 5).
The terms of the option must prohibit the option holder from transferring any of his or her rights under it.
If the terms of an option allow its exercise after the holder’s death, they must also state that the personal representatives must exercise the option within 12 months of the date of death. (Para 38 Sch 5).
For options to qualify, they have to be granted to recruit or retain an employee.
If a company grants EMI options, including replacement options, it must notify HMRC’s Small Company Enterprise Centre (SCEC) within 92 days of the date of grant.
Companies must send:
HMRC provide Form EMI 1 to notify grants of EMI options.
If a company believes it has a reasonable excuse for not notifying HMRC on time, it should send in the notification as soon as the excuse comes to an end. The company should advise HMRC of all the facts. The delay or failure on the part of the company’s agents is not a reasonable excuse on its own. (Para 53 Sch 5).
Yes. The employer will need to obtain the relevant information from the trustee or shareholder to comply with Schedule 5.
HMRC can correct obvious errors or omissions in a notification within nine months of a notification being given. The Small Company Enterprise Centre (SCEC) will inform the employer of any changes made. The employer then has three months from the date of issue to reject the corrections. (Para 45 Sch 5).
The employer should let the SCEC know if he realises that he has made a mistake in notifying the grant.
HMRC can open an enquiry to deal with questions regarding the notification, for example to check that the company is a qualifying company (Para 46(2) Sch 5). In this case the notice of enquiry is sent to the employer.
HMRC can also enquire into whether the employee holding the option meets the working time commitment. The employee will be given notice of the enquiry and a copy of the notice will be given to the employer. (Para 46(3) Sch 5).
HMRC may send a notice of enquiry at any time within 12 months beginning with the end of the 92 day period within which the employer is required to notify the grant.
If HMRC discovers that information provided in or in connection with the notification was false or misleading, a notice of enquiry can be issued after this period.
If no enquiry is opened, the option is taken to meet the requirements of Schedule 5.
HMRC will notify the employer or employee that the enquiry is closed and will state whether or not the requirements of Schedule 5 have been met.
The employer or the employee can apply to the Commissioners to direct HMRC to issue a closure notice within a specified period. The Commissioners hearing the application will give a direction, unless they are satisfied that there are reasonable grounds for not giving a closure notice within a specified period. The Commissioners are independent of HMRC. (Para 46 Sch 5).
Normally, the General Commissioners will hear applications. They are a local independent tribunal appointed to hear cases which arise in a particular area. However, employers have the right to have their appeal heard by the Special Commissioners who are a special full-time tribunal. If an employer wishes to have an application heard by the Special Commissioners he should indicate this when the application for the closure direction is made.
An employer can appeal against a decision by HMRC that:
An employee holding an option can appeal against a HMRC decision that:
This section explains the Income Tax and National Insurance contributions treatment of EMI options. It includes details of charges that may arise when:
There is no Income Tax or National Insurance contributions charged on the grant of a qualifying EMI option.
If an EMI option is exercised within ten years and there has been no disqualifying event, there will be no Income Tax or National Insurance contributions due, provided that the employee buys the shares at a price at least equal to the market value they had on the day the option was granted. If the option is a replacement option, it must be exercised it within ten years of grant of the original option. (S530 ITEPA 2003).
If the option enables an employee to buy the shares at less than their market value at the date the option was granted, there will be an Income Tax charge when he exercises the option. There will also be National Insurance contributions where the shares are readily convertible assets.
The taxable amount is the lower of:
A is granted an option to acquire 1,000 shares. The market value of each share at the date of grant is £5. The price he will pay for them (the exercise price) is £3.
(1) Market value on exercise is £12
The Income Tax charge is on the discount (market value at date of grant less the exercise price) £5 x 1,000 less £3 x 1,000 = £2,000 (amount of discount).
(2) Market value on exercise is £4
The Income Tax charge is on the market value at exercise (because it is
lower than the market value at date of grant) less the exercise price
£4 x 1,000 less £3 x 1,000 = £1,000.
(3) Market value on exercise is £2
The market value on the date of exercise is less than the exercise price. There is no Income Tax charge.
Income Tax is charged if the employee does not pay anything for the shares when he exercises the option. The charge is on the market value of the shares at the time the option was granted, or if lower, the market value of the shares at the time the option is exercised.
B is granted an option to acquire 1,000 shares. The market value of each share at the date of grant is £5. The exercise price is nil.
(1) Market value on exercise is £15
The Income Tax charge is on the discount (market value at date of grant less the exercise price) £5 x 1,000 less £0 = £5,000 (amount of discount).
(2) Market value on exercise is £3
The Income Tax charge is on the market value at exercise (because it is lower than the market value at date of grant) £3 x 1,000 = £3,000.
There will be no tax relief when the option is exercised. (S529 ITEPA 2003).
If there is an Income Tax charge upon exercise of the option, and shares acquired under the option are readily convertible assets, the employer must operate PAYE and account for National Insurance. (S700 ITEPA 2003)
Broadly, readily convertible assets are shares that can be sold on a recognised stock exchange or for which trading arrangements are in place, or are likely to be put in place, at the time when the shares are acquired. An employee will have to pay National Insurance contributions when he exercises an EMI option if the shares are readily convertible assets and there is an Income Tax charge on the shares. (S702 ITEPA 2003)
Further details are available in our Employment-Related Securities Manual.
Yes. Measures introduced in the Child Support, Pensions and Social Security Act 2000 allow employers to recover National Insurance contributions payable on share options from employees.
The amount chargeable to Income Tax may be reduced by the amount of the employer’s (secondary) National Insurance contributions if there is a joint election in place. A joint election is an election signed by both employee and employer to transfer the employer’s (secondary) National Insurance contributions liability to the employee.
A number of changes or developments can disqualify an option from EMI relief. These are called disqualifying events. A disqualifying event restricts tax relief.
The following are disqualifying events:
The independence requirement for companies is set out. Loss of independence is a disqualifying event, unless in the case of a company reorganisation, there is a qualifying replacement option.
Details of the trading activities requirement are set out.
If the company whose shares are under option no longer meets this requirement it is a disqualifying event. Some companies may have originally met the trading activities requirement because they were preparing to carry on a qualifying trade when the option was granted. There is a disqualifying event if:
There will be a disqualifying event if an employee who has been granted the EMI option no longer meets the employment requirements set out. There will also be a disqualifying event if the hours committed are not actually worked. (S535 ITEPA 2003).
Any variation to the terms of the option will be treated as a disqualifying event if it:
An alteration to the share capital of the company whose shares are under option will be a disqualifying event if it:
If the shares under option are converted from one type of share to another it is a disqualifying event unless
There is a disqualifying event when an employee is granted a Company Share Option Plan option on top of unexercised CSOP and EMI options taking the employee beyond the £250,000 limit on holding options over shares. (S539 ITEPA 2003).
If the EMI option is exercised within 40 days of the disqualifying event, the tax advantages are preserved.
If the EMI option is not exercised within 40 days (including occasions when the option is not capable of exercise within this time limit) there will be a tax charge on exercise.
Income Tax (and National Insurance, where the shares are readily convertible assets) is charged on the amount by which the market value at the date of exercise exceeds the market value immediately before the disqualifying event.
A is granted an option to acquire 1,000 shares.
The market value of each share at the date of grant is £5. The exercise
price is £5.
The market value of a share immediately before a disqualifying event is £9.
The market value on the date of exercise is £25.
The taxable amount is limited to the growth in value after the disqualifying event (£25 - £9) x 1,000 = £16,000.
Income Tax (and National Insurance, where the shares are readily convertible assets) is charged on both the
B is granted an option to acquire 1,000 shares.
The market value of each share at the date of grant is £5. The option
exercise price is £3.
The market value of a share immediately before a disqualifying event is £9. The market value on the date of exercise is £25.
The taxable amount when B exercises the option will be on both:
The total taxable amount will therefore be £18,000.
There is no Income Tax charge. The amounts chargeable to Income Tax when you exercise an EMI option, including in the event of a disqualifying event, cannot be more than the amount chargeable if it were not a qualifying option.
If shares are acquired that are restricted or that carry the risk of forfeiture, Income Tax may arise after the options have been exercised when the restrictions are lifted. If an election is made under section 431 ITEPA 2003 before the options are exercised, the restrictions are ignored at the date of exercise so that tax is payable when the option is exercised as though the shares were not restricted. The election is often beneficial, as the amount of tax payable may be lower at the date of exercise than at the later time when the restrictions are lifted.
In normal circumstances, tax is not payable on the exercise of EMI options over restricted shares, but it may be payable if restricted shares are acquired at a discount or more than 40 days after a disqualifying event. In circumstances when the exercise is tax-relieved, the option holder is deemed to have made a section 431 election so that no further tax charge arises when the restrictions are lifted.
Where restricted shares are acquired at a discount, the amount liable to tax is the difference between the 'chargeable market value' and the amount paid for the shares. The 'chargeable market value' is the lower of the market value at the date of grant and the market value at the date of exercise. Where no section 431 election is in place, the market value to be used is the actual market value, taking into account the restrictions. Where a section 431 election is in place the 'chargeable market value' is the lower of the actual market value at the date of grant and the unrestricted market value at the date of exercise.
Where restricted shares are acquired more than 40 days after a disqualifying event, tax is calculated on the increase in value after the disqualifying event. If no section 431 election has been made, the actual market value is used in the calculation. If there has been a section 431 election, the actual market value is used at the date of grant and at the date of the disqualifying event, and the unrestricted market value at the date of exercise.
C is granted on option to acquire 20,000 shares.
The actual market value of each share at the date of grant is £1. The unrestricted market value of each share at the date of grant is £1.50.
The option exercise price is 60p.
The actual market value of each share at the date of exercise is 80p. The unrestricted market value of each share at the date of exercise is £1.20.
The taxable amount without a section 431 election is:
(£0.80 - £0.60) x 20,000 = £4,000
The taxable amount with a section 431 election is:
(£1.00 - £0.60) x 20,000 = £8,000
With a section 431 election the taxable amount will be increased but there will be no further charge to tax when the restrictions are lifted.
Where restricted shares are acquired more than 40 days after a disqualifying event, Income Tax is charged on the amount by which the market value at the date of exercise exceeds the market value immediately before the disqualifying event.
If no section 431 election has been made, the market value to be used is the actual market value taking into account the restrictions.
If there has been a section 431 election, the market value to be used is the actual market value at the date of grant and at the date of the disqualifying event, and the unrestricted market value at the date of exercise.
National Insurance contributions are payable if the exercise is taxable and the shares are Readily Convertible Assets (RCAs). RCAs are, broadly speaking, shares that can be sold on a recognised investment exchange or for which trading arrangements are in place or are likely to come into place.
If an employee exercises an EMI option and does not pay Income Tax on the
option gain because of the EMI tax relief, he may be liable to tax if a 'stop
loss' provision exists. This is a provision that allows an employee to sell
his shares for an amount greater than their market value at the time of disposal.
The taxable amount is the consideration given on disposal less the market
value at the time of disposal and less any expenses incurred in connection
with the disposal. (S446X ITEPA2003).
If an employee releases an option, and receive some consideration in return
for the release, he will have to pay Income Tax on the amount of the consideration.
This will be the case whether or not the consideration is in cash.
Capital Gains Tax is a tax that may be due when an individual makes a gain on the disposal of his shares. He can make gains up to the annual exempt amount each tax year without having to pay Capital Gains Tax. There is an annual exempt amount for each tax year but it cannot be carried forward if it is not used.
For more information about Capital Gains Tax please follow this link
If shares are sold for more than they cost, Capital Gains Tax may be payable on the gain. The gain on the shares is calculated by deducting from the sale price
If anything was paid for the grant of the option, this also forms part of the cost.
If Income Tax was paid when the option was exercised or after the shares were acquired, the amount charged to Income Tax will also form part of the cost. If an employee pays part or all of your employer’s National Insurance contributions when he exercises his option and he gets Income Tax relief for this payment, the Income Tax relief will not reduce the cost for capital gains purposes.
If the sale price is less than the cost, there is a loss for Capital Gains Tax. This loss if claimed can be set against capital gains of the same year and any unused loss can be carried forward to future years.
For gains arising before 6 April 2008, taper relief could reduce the amount of a gain chargeable to Capital Gains Tax. The amount of taper relief depended upon the length of the period for which the chargeable asset had been owned and upon whether the asset was a business or a non-business asset. For a business asset disposed of after 5 April 2000 the maximum taper relief would normally be applicable once the asset had been held for a period of two or more whole years. Where an asset was not a business asset for the whole of the period of ownership, an apportionment might be required.
After 5 April 2000 shares would be a business asset if the shareholder was an employee of the company, its subsidiary or a qualifying joint venture company and he did not have an interest of more than 10 per cent in the company, or, if his interest was more than 10 per cent, the shares were in a trading company or in the holding company of a trading group. Shares acquired by exercising an EMI option were treated for taper relief purposes as if they had been acquired when the option was granted, not the date on which it was exercised. If there was a disqualifying event, this extension of the taper relief holding period still applied provided the option was exercised within 40 days of the disqualifying event. More on taper relief can be found in Self Assessment Helpsheets 279 and 287 and in the Capital Gains manual.
From 6 April 2008, Capital Gains Tax is payable at 18 per cent. This is chargeable on all gains above the annual exemption. Taper relief is no longer available to reduce the amount of the chargeable gain. Capital Gains Tax is payable on 31 January after the end of the tax year in which the shares are sold.
Gains made before 6 April 2008 were charged at a rate that depended upon the option holder’s level of income liable to Income Tax. Capital gains after taper relief had been applied were added to the income liable to Income Tax and were charged at the appropriate rates.
Provided that the employee and his spouse or civil partner are living together, Capital Gains Tax is not normally payable when he sells or gives his shares to his spouse. He is treated as making neither a chargeable gain nor an allowable loss. When the spouse sells the shares, her cost will be the same as his.
This section takes you through the requirements for replacement options in the event of a takeover or merger. It also looks at rights issues.
If a company whose shares are the subject of qualifying options (EMI company) is taken over or merges, it loses its independence. This is a disqualifying event unless the company taking over or merging with the EMI company (acquiring company) grants a replacement option in exchange for the qualifying option within six months.
This can occur when the acquiring company:
A replacement option has to satisfy certain requirements in order for it to be a qualifying option. The company granting the replacement option does not have to meet the gross assets test when the new option is granted, but it has to meet the following conditions:
A replacement option is treated for the purposes of Schedule 5 as if it had been granted on the date on which the old option was granted.
This final section lists a few procedural reminders.
A company whose shares are the subject of an EMI option at any time during a tax year must fill in an EMI tax return, Form EMI 40, and send it to HMRC within three months of the end of the tax year.
Employees will need to give details of any EMI option they have exercised in a Self Assessment tax return for the tax year in which the option was exercised, if the exercise was liable to Income Tax but was not taxed in full by the employer.
Once the company has notified HMRC about an EMI option, it should monitor it to ensure that it continues to meet the requirements set out in this guidance. It needs to be aware of circumstances that could turn into disqualifying events.
HMRC provide Form EMI 1 to notify grants of EMI options.
If EMI options in an unquoted company are granted the company can, if it wishes, agree the market value of the shares with HMRC Shares and Assets Valuation (SAV). To agree a market value with them the company will need to propose a value for the shares and provide background information to support the proposal. It will need to complete form Val 231 for EMI options.
The form outlines the information needed to support the proposed valuation. When it is complete, it should be sent it to HMRC Shares and Assets Valuation (SAV).
If the form is not used or the company does not supply all the information requested, it may be asked to supply the missing information before a valuation can begin. This could delay the agreement of the valuation. When HMRC Shares and Assets Valuation (SAV) receive your completed form, they will tell you within ten working days if they need any further information.
Asking HMRC to agree a valuation is not the same as:
Companies need to contact the Small Company Enterprise Centre separately to fulfil these requirements.
Shares and Assets Valuation (SAV)
(Share Schemes)
Ferrers House
PO Box 38
Castle Meadow Road
Nottingham
NG2 1BB
Tel: 0845 601 5693
Fax: 03000 562 705
| Term | Definition |
|---|---|
| CSOP option | A Company Share Ownership Plan (CSOP) option granted to an individual under the provisions of Schedule 4 ITEPA 2003 |
| Disqualifying event | An event which results in an option ceasing to be an EMI option qualifying for relief |
| EMI option | An Enterprise Management Incentive option granted to an individual under the provisions of Schedule 5 ITEPA 2003 |
| Employer | The company employing the individual to whom options are granted under the EMI option |
| Qualifying company | A company, which satisfies the requirements of Part 3 of Schedule 5 ITEPA 2003 |
| Qualifying subsidiary | A subsidiary, which satisfies the requirements of Part 3 of Schedule 5 ITEPA 2003 |
| Qualifying trade | A trade, which satisfies the requirements of Part 3 of Schedule 5 ITEPA2003 |
| Recognised Stock Exchange | A stock exchange designated as a recognised stock exchange by order of HMRC under Section 841(1) (b) Income and Corporation Taxes Act 1988 |
| Schedule 5 | Schedule 5 Income Tax (Earnings and Pensions) Act 2003 |
| Working time commitment | Working time that satisfies the requirements of Part 4 of Schedule 5 ITEPA 2003 |
