Stock Options under EMI scheme

Stock Options under EMI scheme

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Our client issued stock options in the last financial year.  The options were issued under EMI scheme and duly registered with HMRC using their portal with Ee's NINO and other details logged appropriately.  However, following our review we realised that the issuing company did not meet one of the key criteria for operating under EMI scheme - ie the gross turnover was more than the HMRC threshold of £30m on the date of grant of options.  Some of the employees left the business since and their options lapsed, however there are still some options that will be potentially converted to equity shares on a future event.  We understand that the impact of the existing options in issue would be that the options, when exercised in the near future, would be fully taxable under CGT at the employee's tax rate instead of the 10% concessionary EMI rate (any other consideration for the client?).   What are the appropriate actions client needs to take to deal with this?  Any advice or clarity on this issue would be appreciated.

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By nrw2
13th Dec 2023 15:15

Gladstone wrote:

We understand that the impact of the existing options in issue would be that the options, when exercised in the near future, would be fully taxable under CGT at the employee's tax rate instead of the 10% concessionary EMI rate (any other consideration for the client?).

Alas you may need to re-understand - upon exercise the delta between the fair market value and the exercise price at the time of exercise will likely be charged to income tax (and potentially employer + employee NI) rather than CGT. This stuff can get very expensive, I'd spend the money on getting it right now - you may find that cancelling the options and issuing replacement CSOP options is preferable to sticking with non tax advantaged options.

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Accountants & Business Advisers
By Gladstone
13th Dec 2023 16:37

Thank you for your response. CGT was mentioned in the context of the potential future sale by the holder (of course income tax + NIC applicable will be applicable as similar to any other earnings if outside the EMI criteria).

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Replying to Gladstone:
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By nrw2
13th Dec 2023 16:53

Gladstone wrote:

Thank you for your response. CGT was mentioned in the context of the potential future sale by the holder (of course income tax + NIC applicable will be applicable as similar to any other earnings if outside the EMI criteria).

Your post stated that "...the options, when exercised in the near future, would be fully taxable under CGT...". The CGT will fall due on disposal of the shares, not exercise of the options. Income tax / NI, if applicable, will fall due on exercise of the options.

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By Ruddles
13th Dec 2023 17:19

There is no such thing as the '10% concessionary rate'. Either the shares will qualify for the statutory relief or they will not. Depends on the % held by the employee. I'm guessing that it would be below 5%, but other guesses are available.

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By nrw2
14th Dec 2023 09:08

I don't believe the BADR min 5% ownership requirement applies to shares acquired via the exercise of EMI options?

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By Tax Dragon
14th Dec 2023 09:34

I don't believe any shares acquired in the scenario presented will have been acquired via the exercise of EMI options?

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By nrw2
14th Dec 2023 09:50

Ah, understood - and agreed, in the absence of EMI there is a 5% ownership threshold! I'll shut up.

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