A brief overview of what HMRC deems acceptable and unacceptable uses of accelerated vesting.
As EMI is a tax-advantaged option scheme, it is important that no steps are taken to change the original terms of the option agreement once accepted. HMRC may deem certain changes to be a material change to the option agreement, which would result in a disqualifying event where the EMI options lose their tax benefits (unless there was a release and re-grant).
In broad terms, it is critical that any changes are specifically anticipated in the original agreement, and do not impact the overall exercise window of the agreement.
For example, if it's stated that vesting can be accelerated at board discretion, the subsequent acceleration is not a problem, so long as the time when the options can be exercised (whether at a certain time or on an exit) is not affected.
An example agreement where acceleration would not be acceptable even with a board discretion clause would be:
EMI options, annual time-based vesting, exercisable at any time.
In this scenario, the recipient is an employee and the granting company doesn’t participate in an exit event.
The first tranche of the employee’s options will vest a year from now and become exercisable once vested.
If you were to accelerate vesting, you would be effectively changing the date at which the options can be exercised – which is a disqualifying event.
However, there is an exception when processing good leavers.
Again, the ability to accelerate vesting comes down to whether the original agreement includes the notion that, at the point of leaving, the terms can be changed (e.g. from “Exit only” to “Exercisable”). If so, accelerated vesting and exercising is acceptable.
If “complete discretion” is selected as the leaver clause in the original agreement, it’s important that it also specifically references the possible change to the original vesting or exercise conditions.
For full details, please refer to HMRC guides on acceptable and unacceptable examples of accelerated vesting. If you are planning on changing the terms of a live EMI agreement, please seek professional legal advice to ensure it is safe to do so.
Does this apply to unapproved options too?
As unapproved options aren't tax advantageous like EMI, they don't have the same rules as EMI.
It is possible to change the conditions of the original agreement by mutual consent (i.e. the granting company and recipient agree to new conditions), or by using a board discretion or modification clause.
With a modification clause, the board may make unilateral changes to the agreement provided they do not prejudice or disadvantage the option holder.
For example, the board may decide to accelerate vesting for an option holder - but they couldn't decide to reverse vesting and take some of their options away (unless there were just and reasonable grounds to do so, in line with the terms of the agreement).
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