EMI Tax Benefits Made Simple

Navigating the tax treatment of EMI for companies and employees.

Navigating the tax treatment of EMI can be tricky, but don't worry, we've got you covered! While professional advice is always recommended, here's a quick overview to get you started📘

Contents📋

• Tax Benefits for Companies

  - When Setting up an EMI scheme

  - When an Employee Exercises their Options (corporate tax relief)

  - Scenario 1: Exercise Price Matches Actual Market Value (AMV)

  - Scenario 2: Exercise Price Below Actual Market Value (AMV)

• Tax Benefits for Employee

  - No Tax at Grant

  - Upon Exercise

  - Disqualifying Events

  - When Selling Shares

Tax Benefits for Companies💼

When Setting up an EMI Scheme

Good news! 🎉 You may be able to offset the cost of setting up your EMI scheme through Corporation Tax relief. 

By joining Vestd, you could save 25% on your plan through Corporate Tax relief. Typically, the costs associated with your EMI scheme (like your Vestd plan) are considered revenue costs rather than capital costs, making them deductible📉

So, when your company covers the costs of running an employee share scheme, these expenses can be deducted from your taxable trading profits. If you manage the scheme directly, you’ll handle the costs yourself. 

If you use a trust, the trust may cover costs using contributions from your company.💰

These costs can include:

• Share Acquisition Costs: Such as fees, commissions, and stamp duty.
• Financing Costs: Like interest on loans taken by the trust.

In your accounts, both financing and administrative costs should be recorded as they occur, not when funds are transferred to the trust📅. This same timing applies to tax deductions, unless specific legislation dictates otherwise.

For employers’ National Insurance (NI) contributions related to the share scheme, these also count as administrative costs. The timing of these deductions will follow your accounting practices.

However, if you and your employees agree to shift the NI liability to them, your company won't get a deduction for those contributions since you no longer have the liability.

When an Employee Exercises Their EMI Option💡

Corporate Tax relief

When an employee exercises their EMI options, your company can benefit from Corporate Tax relief on the difference between the exercise price and the current market value of the shares.

Let's break down how this works with two scenarios.

Scenario 1: Exercise Price Matches Actual Market Value (AMV)📈

• Employee's Options: 1,000

• Exercise Price: £1 per share (equal to the market value at the time of grant)

• Market Value at Exercise: £5 per share

In this scenario, the employee pays £1,000 to exercise their options (1,000 options × £1) and receives shares now worth £5,000. The company can claim Corporate Tax relief on the £4,000 difference in value (£5,000 - £1,000).

Scenario 2: Exercise Price Below Actual Market Value (AMV)📉

• Employee's Options: 1,000

• Market Value at Grant: £1 per share

• Exercise Price: £0.01 per share

• Market Value at Exercise: £5 per share

Here, the employee pays just £10 to exercise their options (1,000 shares × £0.01) while the shares are now worth £5,000.

Company’s Tax Relief:

• Discount Relief: The company can claim tax relief on the £990 discount (1,000 shares × £0.99) i.e. the company can claim tax relief on the £4,990 growth in value (1,000 shares × (£5 market value - £0.01 exercise price))🏆.

These tax benefits make EMI options an attractive incentive for both employees and companies, providing significant savings while rewarding your team.

For more information on Actual Market Value, please refer to our guide - What are AMV and UMV?📚

Tax Benefits for Employee🎉

Curious about the tax perks of EMI options for employees? We've simplified the journey for you, so you can easily navigate the potential tax benefits at each stage of your EMI scheme.

Let’s dive in🥽

No Tax at Grant 🛡️

When employees receive EMI options, there's no income tax or National Insurance (NI) to worry about at the time of grant.

📝 Example: Kat is granted 1,000 EMI options at £1 per share. Since Kat doesn’t have to pay tax when they receive these options, they can focus on growing with the company without any tax concerns upfront.

Upon Exercise🤑

If the exercise price is below the market value at the time of the grant, the difference is subject to income tax and potentially NI. If the share value drops, taxes are based on the current, lower value.📉

📝Example: Suppose Kat exercises their options when the market value is £5 per share. 

If Kat’s exercise price was set at £1 per share (when they were granted options), they’ll pay income tax on the difference—£4 per share (£5 market value - £1 exercise price). 

However, if the market value has dropped to £3 per share, Kat’s tax will be based on the difference between £3 and £1, which is £2 per share.

Disqualifying Events🚨

If your company or the employee no longer meets EMI criteria, options could lose their tax benefits. However, if the options are exercised within 90 days of a disqualifying event, the tax advantages can still apply.⏳

📝Example: Imagine your company undergoes a change that disqualifies it from EMI eligibility (review HMRC’s guide on potential disqualifying events). If Kat exercises their options within 90 days of said disqualifying event, they can still enjoy the tax benefits. If Kat waits longer, any gain in value might be taxed as regular income.

When Selling Shares💸

When employees sell their shares, Capital Gains Tax (CGT) is due on any gain exceeding their allowance. EMI options often qualify for a reduced CGT rate of 10% through Business Asset Disposal Relief (BADR) if held for at least 24 months from the grant date.

📝Example: Kat exercises their options and sells their shares two years later. If Kat’s shares have increased in value, they’ll only pay 10% CGT on the profit, thanks to BADR. But if Kat leaves the company and then sells the shares, they’ll be taxed at the standard CGT rate on the difference between the exercise price and the sale price.