Capital gains tax on EMI scheme share options

Article reference: UK-IA-EMP14
Last updated: September 2022 | 5 min read

When you opt into an Enterprise Management Incentives (EMI) employee share scheme you should be aware that you may have to pay capital gains tax (CGT) when you sell the shares.

EMI schemes differ from other types of employee share schemes because they are tax advantageous. In other words, the amount of tax that you pay under such arrangements is lower than that you would pay under a non-qualifying scheme.

Specifically, taper relief (which reduces the amount of tax payable on certain transactions) 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.

The article explains how to calculate a capital gain, and how options under an EMI share scheme are recognised as business assets for taper relief.

Calculating the gain and the tax payable

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 the shares
  • costs of disposal, for example, stockbroker’s commission
  • costs paid for the grant of the option
  • any income tax paid when the option was exercised or after the shares were acquired

Taper relief may then reduce the gain further.

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 a long period of time.

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, the employee will not have to pay any CGT. If the total tapered gains are greater than the annual exempt amount, then 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 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. Tax is payable at the appropriate rates. You can read more about income tax, National Insurance Contributions and EMI share schemes.

CGT is payable on 31 January after the end of the tax year in which the shares are sold.

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 the does not have an interest of more than 10% in the company; or if they do 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, and then sell the shares at a gain then whether the shares are deemed to be business assets depends on to where you move.

If the shares are in an unlisted trading company or the unlisted holding company of a trading group, they will be deemed to 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 leave the company unless you move to:

  • a trading company in the same group
  • the holding company of the same trading group
  • another company in the same group where your shareholding 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.

Transferring the shares to a husband, wife or civil partner

CGT is not normally payable when you sell or give your shares to your spouse. You are treated as making neither a chargeable gain nor an allowable loss. When your partner sells the shares, his or her 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.

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