Tax benefits of EMI option schemes

In summary, an employee's fully vested EMI shares are eligible for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). Employees are charged only 10% Capital Gains Tax at the time of sale. This rate is set to rise to 14% in the 2025/26 tax year and 18% in 2026/27. (More on that below).

The tax is applied only on the original awarded value of the shares, so long as the exercise price has been set at or above the value agreed with HMRC when the options were granted.

Here are the key points you should be aware of regarding the tax benefits of your EMI share options, both for your employees and your business.

EMI tax benefits and information for employees

When an employee accepts the initial grant of EMI options, no income tax or National Insurance (NI) contributions are due.

On exercise, the employee may be liable for income tax or NI. However, this depends on the exercise price of the options:

• If the exercise price is equal to or above the actual market value (AMV) of the options at the time of their initial award, the employee does not owe income tax or NI on the sale.
• If the exercise price is below the AMV of the options at the time of their initial award, only income tax is charged on the difference between the exercise price and AMV value, provided the shares are still not readily convertible assets. Capital Gains Tax (CGT) will also be due at the time of sale; see below for additional information.
• If the exercise price is below the AMV of the options at the time of their initial award and the shares have become convertible assets, both income tax and NI are charged on the difference between the exercise price and the AMV value, and CGT will be due at the time of sale.

If shares are sold in the second or third scenario above, Capital Gains Tax (CGT) must also be paid at the time of their sale but at the discounted BADR rate.

This discounted rate does not apply if shares are acquired on exercise of an option more than 90 days after a disqualifying event (see below for further information on disqualifying events).

Following the Autumn Budget 2024

• The BADR rates will stay the same for the rest of the current tax year but are set to rise to 14% in the 2025/26 tax year and 18% in 2026/27.
• Standard Capital Gains Tax is now charged at 18% for basic rate taxpayers, or 24% for higher or additional rate taxpayers.

EMI tax benefits for your business

If your company offers an EMI share scheme to its employees, and qualifying shares are acquired upon the exercise of EMI options, it will be eligible for a Corporation Tax (CT) relief.

A CT deduction matches the difference between the market value when the shares are exercised by the employee and the amount that the employee pays for them. This value is likely to be the nominal value or the restricted market value at the time that the options are awarded to employees.

If employees are granted EMI options at market value, your CT deduction will be equal to the amount that would have been chargeable to tax, save the EMI relief received.

If EMI options are granted at a discount to market value at the time of their grant, CT relief is given for both the amount of the discount and the amount that would have been charged to tax, save the EMI relief received.

Taxation on EMI options after a disqualifying event

If there is a disqualifying event, EMI options will lose their advantaged tax status, unless they are exercised within 90 days of the date of the event.

If a disqualifying event occurs, an employee's options must be exercised within 90 days. If they are not exercised within this time period, any gain on exercise over their value at the disqualifying event will be subject to income tax and/or NI (if the shares are convertible assets), provided a section 431 election has not been made.

Learn more about how disqualifying events affect an EMI options scheme and taxes due, and how a section 431 election can be made.

Further information on tax and EMI options

The tax treatment of EMI is potentially confusing. It is important that both you and your employees seek professional advice if you have any questions about the tax owed on the sale of EMI shares.