What are the tax benefits of EMI?

Learn about the tax benefits of EMI for both employees and companies.

The tax treatment of EMI is complex, and it's important that both the employee and the company seek professional advice, if they have any doubts. Below is a summary of some of the key points.

Tax benefits for employees

There is no income tax or NI charged when options are granted to employees. Further, there is no income tax or NI due if the option is exercised (i.e. the employee exercises their options and buys the shares) within 10 years of the date of grant, if the exercise price is equal to or above the market value (AMV) agreed with HMRC at the time the options were granted. 

Upon exercise, if the exercise price is below the market value (AMV) at the time the options were granted, income tax is charged on the difference between the two, assuming the shares are not readily convertible assets (in which case NI would also be due).

If the current value of the shares at the time of exercise is below the AMV, that value will be the tax reference point. 

If the company, employee or scheme itself no longer meets the EMI qualifying criteria, that would be classed as a disqualifying event and the options lose their tax-advantaged status, unless they are exercised within 90 days of the disqualifying event. 

If they are not exercised within 90 days, any gain in value between the disqualifying event and their value when exercised will be subject to income tax (and also NI where the shares are convertible assets). If this is the case, employees may need to make a section 431 election (please seek advice on this). 

After the employee has exercised their options, they now own the shares. When they eventually sell their shares, Capital Gains Tax will be due on any gain that exceeds the individual's capital allowance. However, another benefit of EMI is that CGT is discounted to 10% thanks to Business Asset Disposal Relief (BADR, formerly Entrepreneur’s Relief).

But employees must hold their options/shares for at least 24 months from the initial grant date to keep this reduced CGT rate. They must also still be an employee when they sell their shares. 

if they have left the company when they sell their shares, then the normal rate of CGT will apply to any gain in value between the exercise price (if AMV or below) and the value on leaving, and any gain from the value at exercise to the value at sale. 

Tax benefits for companies

When an employee exercises their options, the employing company gets corporation tax (CT) relief on the difference between the exercise price and the market value at the date of exercise. 

If the exercise price was equal to the market value at the time the options were first granted, the CT relief is equal to the amount that would have been chargeable to tax less the EMI relief. 

For example, an employee is granted 1,000 options, and at the time of grant, the market value and exercise price are both equal at £1 per share. A few years later the employee decides to exercise their options when the market value is now £5 per share. The employee is essentially paying £1,000 for £5,000 worth of shares. Now the company itself can claim CT relief on the £4,000 difference. 

There is another scenario where the exercise price is set at a discount to the market value at the time of grant (e.g. £0.01 exercise price to £1 AMV). In this instance, the company can claim CT relief on the amount of the discount and the amount that would have been charged to tax, less the EMI relief.

So, using the figures in the first example with the discounted exercise price, the employee would pay £10 to exercise their 1,000 options. As these shares are now worth £5 each, the company can claim CT relief on the £4,990 difference, as well as on the £990 exercise price discount. 

If the company is preparing for an exit, it can use this CT relief as a tax asset to increase the sale price. For example, if your company has 10% of its share capital over EMI options, and it has been valued at £10m, you can add the tax asset to the sale price (i.e. £10m x 10% EMI options share capital x 19% corporation tax relief). In this scenario, the sale price should increase by £190,000, which would benefit all shareholders. 

 

For full details on the tax treatment for EMI, read HMRC's guide

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.'