How the taxation of EMI options is affected by disqualifying events
There are a number of reasons why an EMI scheme may no longer qualify as such. This will be due to the occurrence of a "disqualifying event."
Disqualifying events include the following:
- Employees leaving the company.
- Employees reduce their time spent working for the company (below 75% of their total working time).
- Your company no longer meets the qualifying criteria for an EMI options scheme, such as becoming a public entity or employing more than 250 individuals.
- The EMI scheme or options themselves don't meet the qualifying criteria.
A full list of disqualifying events can be found on the GOV.UK website.
Taxation on EMI options after a disqualifying event
Employees must exercise their options within 90 days of a disqualifying event to maintain Entrepreneurs' Relief and the 10% Capital Gains Tax (CGT).
If an employee chooses not to exercise within the 90 day period, any value gain from the time of the disqualifying event to the time of exercise will be subject to income tax and potentially NI (if the shares are readily convertible).
More information on taxation of EMI share options can be found on this page.
Taxation after a disqualifying event with a section 431 election
If employees make a section 431 election, which is an election for restrictions on their shares to be ignored, the 90 day period may not necessarily restrict the tax relief on the exercise of shares.
In this case, if options are exercised after the 90 day period, employees will be charged income tax based on the increase in value after the disqualifying event instead of using the AMV to determine tax owed.
For more information on section 431 elections and how they affect the taxation of EMI options after disqualifying events, please consult your local tax professional or this page on the GOV.UK website.