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, but are treated as income upon exercise. Meaning when you exercise your unapproved options, you're liable for income tax the difference between the exercise price and the AMV of the shares at the time. Learn more about what tax you have to pay as an unapproved option holder here.
And when you come to eventually sell the shares, you'll be liable to pay Capital Gains Tax on the difference between the exercise price and the final sale price. 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.'