The tax treatment of EMI is complex, and it is important that both the employee and the company seek professional advice, if they have any doubts.
Below is a summary of some of the key points.
For an employee, there is no income tax or NI charged when the grant of an option is accepted. Further, there is no income tax or NI due if the option is exercised (ie the employee exercises the option and buys the shares) within 10 years of the date of grant, if the exercise price is equal or above the market value (AMV) at award.
On exercise, If the exercise price is below the market value at award, then income tax only is charged on the difference between the two, assuming the shares are still not readily convertible assets (in which case NI would also be due). If the current price is below the AMV, then that will rather be the tax reference point.
If there is a disqualifying event such that the company, employee or scheme no longer meets the qualifying criteria, then the options lose their advantaged tax status, unless they are exercised within 90 days of that date. If they are not exercised within 90 days, any gain on exercise over their value at the disqualifying event will be subject to income tax (and also NI where the shares are convertible assets). It may also be important for employees at this point to make a section 431 election (seek advice regarding this).
On sale of the shares CGT will be due, to the extent that any gain exceeds the individual’s capital allowance - but at the discounted Entrepreneur’s Relief (ER) level of 10%. ER will not be applicable if the shares are acquired on exercise of an option more than 90 days after a disqualifying event.
For the company, the employing company gets a corporation tax (CT) deduction if qualifying shares are acquired by employees upon the exercise of an EMI option.
The CT deduction matches the difference between the market value when the shares are exercised by the employee and the amount that the employee pays for them (likely to be the nominal value or the restricted market value on award). The market value at this point is the actual market value of the shares at the time. So if this is not at exit, then it is likely to be at a discount to the Unrestricted Market Value of the business at the time.
Where the option is to acquire shares at their market value at the time of the grant of the option, the CT deduction is equal to the amount that would have been chargeable to tax but for the EMI relief.
Where EMI options were granted at a discount to market value of the time (eg at nominal value only), CT relief is given for both the amount of the discount and the amount that would have been charged to tax but for the EMI relief.
For further detail: