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EMI options: Don’t forget the Election

When an employee exercises an EMI Share Option and acquires shares, Income Tax is normally payable if the price payable for the shares is less than their market value as at the date the option was granted (this market value will usually have been agreed with HMRC at the time the option was granted). The amount charged to tax is normally the difference between the two figures. What is sometimes overlooked is the fact that in such a case there will normally be a further charge to Income Tax under the "restricted securities" regime on a subsequent sale (or other disposal) of the shares. This further charge can however be replaced with a charge to Capital Gains Tax if the employee and the employer make a special tax election ("a s431 election") within 14 days of the exercise of the Share Option.

In most cases the s431 election will simply save tax on the eventual sale of the shares, will have no disadvantage and should routinely be made. However, in the special and unusual case where the market value of the shares has gone down between the date the option was granted and the date the shares are acquired, the position is much more complex. In such a case the election may not necessarily be advantageous in every case and the employee should take further advice before making it.

If the price payable for the shares is at least equal to their market value as at the date of grant a s431 election is deemed to have been made when the option is exercised and no further action is needed on the part of the employee. In such a case the option will not of course be exercised if the shares have dropped in value.

For further advice please contact Stephen.deutsch@bkltax.co.uk, 0208 922 9119.