Learn about the tax implications around EMI and unapproved options, from exercise to sale.
There are a few different kinds of rewards you can receive via Vestd, but if you have received options (as opposed to growth shares), these will be either unapproved or EMI options.
Both give you the option to purchase shares for a fixed price in the future, once you have met specific time or performance-based conditions.
You can view your options, and the conditions associated with them, in your recipient dashboard. This will also show any other shareholdings or options you have with other companies that are using Vestd.
When you exercise your options, you'll own shares in the company. What class of share these belong to, and the rights they have, will be predetermined in the option agreement.
The difference between EMI and unapproved options is in their tax treatment by HMRC.
EMI is a tax-advantageous scheme set up by the government to encourage share ownership amongst small and medium companies.
There are quite strict rules the company and individual must follow to qualify for the tax benefits. For the recipient, the main criteria is that they are, and continue to be, employed by the company for at least 25 hours per week or 75% of their working time. Additionally they must have no more than a 30% equity stake in the business. Learn about the tax benefits of EMI under various scenarios here.
When you come to exercise your EMI options (so long as all criteria has been met), you're only liable to pay tax on the difference between the exercise price and the actual market value (AMV) of the shares when they were granted to you (not when you exercise). You can see these figures — and a projected value calculator to calculate your potential profit and tax liabilities — on your recipient dashboard.
When you eventually sell the shares, you'll be liable to pay Capital Gains Tax on the difference between the share value when they were granted to you and the final sale price. This is currently set at the discounted Entrepreneur's Relief rate of 10%, but only if the options or resulting shares have been held for at least two years. If not, normal Capital Gains Tax applies.
Unapproved options, however, have very few rules or tax benefits associated with them, and tax liabilities vary depending on who is receiving the option and the conditions associated with their option agreement.
We go into much more detail about unapproved options and tax for employees, non-employees of the granting company. We also explain what happens when a company is granted unapproved options.
To keep things simple, we'll explain when tax liabilities may arise over the lifecycle of an unapproved option:
- On grant of the option: An Income Tax liability is created on the difference between the exercise price and current market value of the shares. Non-employees only.
- When the options vest: Similarly, an Income Tax is created on the difference between the exercise price and market value of the shares each time the options vest. Non-employees only.
- On exercise of the option: Capital Gains Tax due on the difference between the exercise price and the current MV of the shares.
- On eventual sale of the shares: CGT due on the difference between MV at exercise and the eventual sale price.
Of course, each tax liability depends on a number of factors, such as:
- Who is receiving the option (it's worth mentioning that if a company is granted an option, they will be charged Corporation Tax rather than Income Tax)
- The exercise price in relation to the market value of the shares
- The option holder's CGT allowance
Unlike EMI, no Entrepreneur's Relief or other discounts are applicable to unapproved options.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'