Victoria House, Colmore Row, Birmingham, B3 3BD. Follow us on Twitter.
Follow us on LinkedIn. Relief from income tax and NICs is afforded to the whole, or part, of the gain realised upon the exercise of a share option granted by a qualifying company to an eligible employee - otherwise than for tax-avoidance purposes - and which complies with the requirements set out in Schedule 5 of the Income Tax Earnings and Pensions Act AND the grant of which has been notified to HMRC within 92 days "an EMI option". Instead, CGT is charged on any gain on sale of the option shares by reference to the exercise price paid and any amount on which relief from income tax was not available at the time of exercise of the option.
If the relevant conditions set out in the Corporation Tax Act are met, relief from corporation tax for the amount of gain realised upon exercise of an EMI option should also be available to the employer company.
Bearing in mind that there can be a significant uplift in the market value of a small holding of shares in an unquoted private company that said, an EMI company can, if all other conditions are met, be a quoted company when all shares are sold upon an "exit event", from a minority interest basis of valuation to a pro rata basis, the combination of these reliefs means that EMI share options are currently the most attractive mechanism for a small company seeking to enable key employees to benefit from growth in value in a tax-efficient manner.
Indeed, a company which qualifies to grant EMI options should always consider doing so before looking at any alternatives.
The option shares must be non-redeemable ordinary shares, but they may be subject to restrictions, whether in the articles of association or in the option agreement.
They can be shares intended to be issued on exercise, or shares to be transferred by, or at the instruction of, the grantor. The EMI regime was intended to allow commercial flexibility, and it does.
By contrast with company share option plans CSOP options, there is no period which must elapse before the option is exercised, and no requirements as to the minimum exercise price or as to when the option must be exercised. However, the relief is only given in respect of any gain representing growth in the market value of the option shares from the date of grant to the date of exercise or, if it occurs more than 40 days before the date of exercise, the occurrence of a "disqualifying event".
For this reason, it is always desirable although not strictly necessary to determine and agree with HMRC Shares and Assets Valuation at or before the time of grant exactly what is the "market value" of a share in the EMI company as at the time of grant.
Further, as the statutory limits on the grant of EMI options are expressed by reference to the "unrestricted market value" of a share, it is normally necessary to seek agreement as to both the "actual" and "unrestricted" market values of an option share as at the time of grant. There is a rule that if options have been granted to an individual up to that limit, he or she cannot, within 3 years thereafter, be granted any more options as EMI options if, for example, the first options lapse or are surrendered.
To avoid this trap, EMI options are commonly granted over shares with an unrestricted market value which is just under the limit! The option must take the form of a written option contract evidencing non-assignable and enforceable, albeit conditional, rights against the grantor - which can be the company or another entity such as an employees' trust or other existing shareholder. Exercise of the option may be performance-linked, but it must be capable of being exercised, if at all, within 10 years and relief is not available if it is exercised after more than 10 years from grant and must not be capable of exercise by personal representatives more than 12 months after the death of the optionholder.
EMI - ACTUAL MARKET VALUE vs UNRESTRICTED VALUE - Tax implications? | AccountingWEB
It is vital that the grant of the option is notified to HMRC Small Companies Enterprise Centre online within 92 days on the form available at " Submit an EMI notification ", as it will not otherwise qualify as an EMI option. The occurrence of a disqualifying event will curb the amount of gain on which tax relief is given as, unless the option is exercised within 40 days after the occurrence of such an event, any growth in value accruing after the event will not qualify for relief.
We can assist with the structuring of an EMI option plan, the drafting of the plan rules and option documentation, as well as with any related company re-organisation and in determining and agreeing with HMRC the market value of shares in the company.
OC and an alternative business structure "ABS" authorised and regulated by the Solicitors Regulation Authority No. The word 'partner', used in relation to this LLP, refers to a member of the LLP.
A list of the members of this LLP is displayed at the registered office of the LLP: Victoria House, Colmore Row, Birmingham B3 3BD. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this page was first published.
Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.
Victoria House, Colmore Row, Birmingham B3 3BD enquiries pettfranklin. Nature of the option The option must take the form of a written option contract evidencing non-assignable and enforceable, albeit conditional, rights against the grantor - which can be the company or another entity such as an employees' trust or other existing shareholder.
Notification of grant to HMRC It is vital that the grant of the option is notified to HMRC Small Companies Enterprise Centre online within 92 days on the form available at " Submit an EMI notification ", as it will not otherwise qualify as an EMI option. How Pett Franklin can help We can assist with the structuring of an EMI option plan, the drafting of the plan rules and option documentation, as well as with any related company re-organisation and in determining and agreeing with HMRC the market value of shares in the company.
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