The major benefit of EMI shares, along with the favorable tax treatment, is that employees are able to purchase their shares at a discount. Because the purchase price is price is typically set at a discount to the prevailing market price at the time of the option grant, employees will be able to later sell the shares at the current, presumably higher market value for a profit.
In order to exercise fully vested EMI options, the shareholder must:
- Purchase the shares from your business at the agreed-upon exercise price set when the options were originally granted.
- Declare as income in their next annual tax return any difference between the exercise price paid and the tax value agreed with HMRC on award (AMV), if below.
- Be prepared to pay 10% Capital Gains Tax (CGT) at the time of sale (see below for more information).
This exercise process can be somewhat difficult for businesses and employees to manage on their own, which is why we suggest using a platform like Vestd. Upon exercise, the Vestd platform automates the creation of Companies House documents, the generation of a share certificate, and an update of your cap table. In addition, the platform informs both the company and the shareholder about the likely tax implications for them.
Taxation on EMI shares upon exercise
If an employee decides to exercise their fully vested shares, they will be subject to a discounted rate of 10% CGT (as opposed to the standard 20%) when they are eventually sold. In addition, as outlined above, if the exercise price is set below the tax price agreed, then the employee is liable for income tax on the difference, and also NI if the shares are deemed readily convertible at the time (i.e. they can be sold immediately).
This tax is applied difference between the price paid for the shares and their value at sale, so long as the exercise price has been set at or above the value agreed to with HMRC when the options were granted.
In addition, the company can claim the difference between the exercise price paid by the employee and the value of the shares at the time as a relief against their corporation tax.
More information on the taxation of EMI shares during the exercise process and how this taxation may vary can be found on this page.