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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

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HM Revenue & Customs
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Enterprise Management Incentives (EMI): Taxation of EMI options: Charge on the exercise of discounted options

If the option enables an employee to buy the shares at less than their market value at the date the option was granted, there will be an income tax charge when he exercises the option. There will also be National Insurance contributions where the shares are readily convertible assets.

The taxable amount is the lower of:

  • the amount of the discount (based on the market value at the date of grant), or
  • the difference between the market value of the shares at the date of exercise and the amount paid for them.

 

Example 1

Exercise of discounted option when shares increase in value

A is granted an option to acquire 1,000 shares

The market value of each share at the date of grant is £5

The price he will pay for them (the exercise price) is £3

Market value on exercise is £12

The income tax charge is on the discount (market value at date of grant less the exercise price) £5 x 1,000 less £3 x 1,000 = £2,000 (amount of discount)

Example2

Exercise of discounted option when shares decrease in value

As above but

Market value on exercise is £4

The income tax charge is on the market value at exercise (because it is lower than the market value at date of grant) less the exercise price

£4 x 1,000 less £3 x 1,000 = £1,000

Example 3

As above but

Market value on exercise is £2

The market value on the date of exercise is less than the exercise price. There is no income tax charge.