EMI - what it could mean for your employees

Transcript

Introduction
This video is an overview of the ABC Limited EMI Share Option Plan and will outline what an EMI option is, what this means for you and the expected UK tax treatment. The rules of the Plan are legally binding and override this guide. A copy of the Plan rules was provided to you with your option certificate. Further copies of the Plan rules are available from the Company Secretary on request.

This guide includes a high level summary of the tax rules that apply to EMI options, based on the legislation in effect at [September 2022]. It does not seek to cover all possible situations and specific advice should be taken when you exercise your option, or if there are any changes in your circumstances such as leaving the business or if you are or become taxable in a country other than the UK during the period between grant and exercise.

A more detailed guide will be provided to you in due course.

What is an EMI option?
An EMI option is a right to buy shares in the company from a certain date in the future which gives you the opportunity to benefit from tax-advantaged treatment. In order to acquire the shares in the future you will need to ‘exercise’ your option by completing the exercise notice included with your documentation and paying the exercise price.

The exercise price is stated in your option certificate.

If the share price at the time of exercise is higher than the exercise price, you will benefit from the increase in value by only paying the exercise price when you exercise your option.

On exercise of your option, you will acquire shares in the company and become a shareholder.

But what are the tax implications of receiving an EMI option and shares in the company?

Tax Implications - Grant
There are no tax implications on grant of the EMI option. The company will notify HMRC that you have been granted an EMI option.

Tax Implications - Vesting
Your option vests over a 4 year period. Vesting means that a portion of the option (or the option in full) will be exercisable if there is a sale or IPO of the company. No taxes arise on vesting of the option.

Tax Implications - Exercise
If there is a sale or IPO of the company, you will be able to exercise your vested options and the company will notify you that you will need to complete and return your exercise notice if you decide to exercise all or part of your vested options. There is an example of the exercise notice in your option pack.

Normally there will be no income tax or national insurance contributions due when you exercise your EMI option. Following the exercise of your EMI options, you will acquire shares in the company and become a shareholder.

The company will report the exercise of your option to HMRC, and if all of the qualifying conditions have been met you will not need to report anything on your UK tax return.

Tax Implications - Sale
Generally you will only exercise your option when you want to sell your shares. Although exercise and sale may happen on the same day, they are two separate steps for tax purposes

When you sell your shares, this is a capital gains tax event and you may need to report the disposal of your shares on your UK tax return. If there is any capital gains tax liability you will pay this directly to HMRC after the end of the tax year.

The taxable gain will be calculated based on your proceeds on sale of your shares less the exercise price you paid.

You may be entitled to the annual capital gains tax exempt amount which will reduce the taxable gain. The expected tax rate that will apply to the taxable gain will normally be 10% but may be 20% for very large gains.

The company does not report any capital gains events as these are a personal tax matter. We recommend seeking personal tax advice when selling your shares.

Summary
Should any circumstances change which may impact the terms of the option or the tax treatment during the life of your EMI option, this may affect the taxes due on exercise or sale. Further guidance will be provided when you exercise your option.

Thank you for watching this video and welcome to the plan!