What are the tax implications around EMI disqualifications?

What happens if the employee leaves the company, or there's another disqualifying event?

There are a number of reasons why an EMI may no longer qualify as such.  This will be due to the occurrence of a "disqualifying event". More information can be found on the HMRC website here.

The most common reason for a disqualifying event is if the option holder is no longer an employee, or ceases to work 25 hours a week or (if lower) 75% of their working time for the company.

In this case, they have 90 days from the disqualifying event to exercise their options and maintain the beneficial EMI tax treatment.

If the exercise price is below the AMV agreed with HMRC at the time of grant, they may also want to make an ITEPA 431 election, which will cause a tax liability at that point up to the UMV, but any further gain to sale will only be treated as a capital gain.

If they keep the options but choose not to exercise them, then any value gained from the time of the disqualifying event to when they actually exercise the options will be subject to income tax (and potentially National Insurance as well if they are readily convertible at that point).

Full details on this, complete with example calculations can be found on the HMRC website here.

It should also be noted that the special Capital Gains Tax rate of 10% (Business Asset Disposal Relief, formerly Entrepreneur's Relief) associated with EMI only applies if the eventual sale of the shares occurs 24 months after the grant date of the options. 


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