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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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  • EMI share option schemes and accelerated vesting

    31 May 2022

    Zeeshan Khilji

    Zeeshan Khilji discusses a peculiar point with regards to EMI share option schemes, which stresses the importance of obtaining specialist advice when implementing or making any changes to share schemes.

    Background

    The EMI share option scheme allows employers to reward employees in a tax efficient manner, without causing a significant drain on the cash flow of the business.

    The primary benefit of the EMI scheme is that options over shares can be granted to key members of staff at today’s value, which can be agreed with HMRC in advance. Provided the exercise price (i.e. the price which the employee pays for the shares upon exercising the options) are at least equal to the market value of those shares at the date of grant, there are no income tax or NIC implications for the employee.

    Assuming the company grows in value and the employee stays with the company, the growth in value can usually be ‘protected’ from an employment income tax charge and would instead only be subject to capital gains, with the capital gains tax arising only when the employee subsequently disposes of their shares.

    Amendment to option agreement and accelerated vesting
    We recently came across a client scenario where, at the time of granting the share options, the vesting period for the share options was set at 5 years. There was however no provision for vesting in an exit event, such as a company sale. Therefore, in the event where the company was sold prior to the vesting date of 5 years, the option holders would not be able to exercise their share options.

    We were asked the question as to the tax implications of amending the option agreements, via a deed of variation, to include an accelerated vesting clause, which would enable the option holders to be able to exercise the option upon sale. Will this be deemed to be a disqualifying event?

    Unfortunately, the legislation is unclear on the extent and nature of amendments to an option agreement which will constitute a disqualifying event. As such, we need to rely on guidance and case law. As expected, what constitutes a disqualifying event in terms of variation of EMI terms has historically been a grey area.

    However, HMRC’s stance on amending vesting periods is a lot clear now as this point was actually addressed in the Eurocopy Plc case where the courts agreed with HMRC that variation of EMI option rights by changing the vesting period meant it was a disqualifying event, meaning that the EMI options will cease.

    In order to ensure there are no adverse tax consequences for the option holders, they would need to exercise their options within 90 days of the variation.

    We also concluded that making such an amendment will result in a new grant of share options. As such, a new valuation would need to be agreed with HMRC.

    Our corporate tax team has specialist expertise in advising on the tax implications of share option schemes. If you would like to discuss tax efficient ways of incentivising employees, please get in touch.

    “EMI share option scheme allows employers to reward employees in a tax efficient manner”

    Get in touch with us today

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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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