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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Enterprise Management Incentives (EMI): employee: CGT: disposal before 6 April 2008 of shares acquired on the exercise of an EMI option

Where before 6 April 2008 an employee disposes of qualifying shares acquired on the exercise of an EMI option, the qualifying holding period for taper relief starts from the date the qualifying option is granted, not the date the shares were acquired; Para 15 Sch7D TCGA92. For more information about taper relief see CG17895+.

A qualifying option is one that meets the requirements of the EMI.

It is possible in some circumstances. for employees to be granted a qualifying “replacement option” over shares in a different company This may happen for a number of reasons, one of which is that the company whose shares are the subject of the option may be taken over by another company. The employee has to exchange the qualifying option for a replacement option within six months of a company reorganisation and meet various other requirements. A replacement option that meets these requirements is treated as if it had been granted on the date on which the old option was granted, and is a qualifying EMI option.

Qualifying shares are shares acquired by the exercise of a qualifying option, see Para 14(3) Sch 7D TCGA92. They include replacement shares that are shares treated as the same asset as a holding of qualifying shares in accordance with TCGA92/S127. To be qualifying shares replacement shares must also satisfy the requirements of paragraph 35 of Schedule 5 ITEPA03 as to the types of shares that may be acquired.

Before the employee exercises the EMI option there may be a disqualifying event. Chapter 9 Part 7 ITEPA03 (Ss533-39) describes these. The most common disqualifying events are the employee leaving or the company ceasing to carry on a qualifying trade. The employee has 40 days after a disqualifying event occurs to exercise his option and acquire qualifying shares. If he exercises his option within the 40 day period, the shares will be qualifying shares and the qualifying holding period for taper relief will run from the date the option was granted.

If the employee exercises an option after the 40 day period there may be an Income Tax charge on exercise. A disqualifying event that takes place after the option has been exercised has no Income or Capital Gains Tax consequences.

Any questions about whether options are qualifying options under EMI or whether there has been a disqualifying event should be referred to the to Specialist Personal Tax, Small Company Enterprise Support Centre, Nottingham Team, 1st Floor, Ferrers House, Castle Meadow Road, Nottingham NG2 1BB.