What are the tax implications for EMI?

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No income tax or National Insurance Contributions will be payable upon the grant or exercise of the option provided that:

  • The options are granted at market value;
  • The options are exercised within 10 years of grant;
  • There are no disqualifying events in relation to the company, the employee or the terms of the option.

If the options are granted at below market value, Income Tax (and possibly National Insurance Contributions) will be due on the grant discount but the charge is deferred until the option is exercised.

A gain liable to capital gains tax may arise on disposal of any shares acquired following the exercise of the option.

The CGT annual exemption (currently £10,900) may be available to reduce any CGT.

From 6 April 2013, Entrepreneurs’ Relief (which reduces the rate of tax to 10%) may also be available provided that the option was granted at least a year before disposal of the shares.

Options must be capable of being exercised within 10 years of the date of grant and relate to fully paid up ordinary shares. Further options may not be granted within a 3-year expiry period where the £250,000 maximum has previously been held.
There is no formal HMRC approval process: effectively a self-certification applies.

Each grant must be covered by a written agreement setting out the terms of the option and HMRC must be notified within 92 days of the date of grant.

In certain circumstances (e.g. where the company is unquoted) HMRC will agree a share valuation at the time of the option grant. There is a fast-track valuation procedure for EMI schemes.

A Corporation Tax deduction should be available in the year the EMI options are exercised for the aggregate difference between the open market value of the shares on the date of exercise and the amount paid by the option holder.

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