Enterprise Management Incentives (EMI): Taxation of EMI options: Capital Gains Tax
If shares are sold for more than they cost, capital gains tax (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.
If anything was paid for the grant of the option, this also forms part of the cost. If income tax was paid when the option was exercised, the amount charged to income tax will also form part of the cost. If an employee pays part or all of his employer’s National Insurance contributions when he exercises his option and he gets income tax relief for this payment, the income tax relief will not reduce the cost for capital gains purposes.
If the sale price is less than the cost, there is a loss for CGT. This loss can be set against capital gains of the same year and any unused loss can be carried forward to future years.
CGT is payable at the appropriate rate depending upon whether the taxpayer is liable at the basic or higher rate. This is chargeable on all gains above the CGT annual exemption limit. There is an annual exemption amount for each tax year, although this cannot be carried forward if it is not used.
Where an employee disposes of shares on or after 6 April 2013 which were acquired on exercise of an EMI option, that disposal may qualify for entrepreneurs’ relief from capital gains tax provided certain conditions are met. Where entrepreneurs’ relief is available, capital gains tax is charged at a rate of 10% on the gain. The normal conditions for entrepreneurs’ relief apply except that:
- it is not necessary for the employee’s shareholding to be at least 5% (in terms of voting power and nominal share capital), and
- the period between grant of the EMI option and disposal of the relevant shares must be no less than two years.
Entrepreneurs’ relief is not available where shares are acquired on exercise of an EMI option more than 90 days after a disqualifying event, nor where the period between the date of grant of the option and the disqualifying event is less than one year.
Further guidance regarding CGT can be found at: