Introduction
This article explains the basics of capital gains tax issues which require careful consideration both when opting into an EMI scheme as an employee and as a company.
Capital gains tax (CGT) is a tax that may be due when an individual makes a gain on the disposal of his shares. He can make gains up to the annual exempt amount each tax year without having to pay CGT. Exempt amounts very from year to year but are usually just under £10,000.
But wait, there’s more .. there is a special CGT advantage for EMI options. Taper relief is extended to run from the date the option is granted, not the later date when it is exercised. This can greatly reduce the CGT payable on any gain when the shares are sold.
Calculating the gain
If shares are sold for more than they cost, CGT may be payable on the gain. The gain on the shares is calculated by deducting from the sale price:
- the amount paid for them; plus
- costs of disposal, for example, stockbroker’s commission;
- any costs paid for the grant of the option; and
- any income tax paid when the option was exercised or after the shares were acquired
Taper relief may reduce the gain. If the gain after taper relief (plus any other tapered chargeable gains made in the same tax year) is no more than the annual exempt amount an individual will not have to pay any CGT. If the total tapered gains are greater than the annual exempt amount CGT is payable on the excess.
If the sale price is less than the cost, there is a loss for CGT. This loss can be set against untapered capital gains of the same year and any unused loss can be carried forward to future years.
How much CGT is due and when?
This depends on the level of income liable to income tax.
The gains chargeable to CGT are added on to the income liable to income tax. CGT is payable at the appropriate rates. For the tax year 2005/06, the rates are 10%, 20% and 40%. For higher rate taxpayers, the appropriate rate is 40%.
CGT is payable on 31 January after the end of the tax year in which the shares are sold.
How can taper relief reduce the capital gains tax payable?
Taper relief reduces the amount of the gain that is chargeable to CGT. The longer a qualifying EMI share option and the shares are held (up to a maximum of two whole years if the shares are business assets) the lower the effective rate of CGT that is payable. So in terms of paying CGT, it benefits you to have held shares for long periods.
Normally, CGT taper relief runs from the date an option is exercised, but there is a special extension of taper relief for qualifying EMI options. An employee is treated as acquiring shares at the date the option was granted. This can greatly reduce the CGT payable on any gain when the employee sells his shares.
Shares acquired from exercising an EMI option will be business assets provided that:
- the option holder is an officer or an employee of the company, its subsidiary or a qualifying joint venture company, and
- he does not have an interest of more than 10% in the company or
- if he does have an interest of more than 10%, the shares are in a trading company or in the holding company of a trading group.
If you leave the company
.. after you have exercised a qualifying EMI option, then sell the shares at a gain ..
If the shares are in an unlisted trading company or the unlisted holding company of a trading group, they will be business assets for taper relief from the grant of the option to the date of sale.
If the shares are in any other sort of company, they will usually stop being business assets for taper relief if you leaves the company unless he moves to:
- a trading company in the same group
- the holding company of the same trading group, or
- another company in the same group where his interest is no more than 10%.
The overall gain usually needs to be apportioned on a time basis with the part relating to the period you worked for the company qualifying for business asset taper and the balance for non-business asset taper.
What if you transfer your shares to your partner and they sell them at a gain?
Provided that you and your partner live together, CGT is not normally payable when you sell or give your shares to your partner. You are treated as making neither a chargeable gain nor an allowable loss. When your partner sells the shares, their cost will be the same as yours.
Of course any taper relief on the gain your partner makes runs from the date you exercised the option and acquired the shares, not the date the option was granted. | 
