When does tax have to paid with EMI share options?

Question

I have vested share options in a small company because I joined when it was an early stage start up. The options are in an EMI (Employee Management Incentive) scheme. The company is not planning to exit for several years and there is at least one more round of investment planned.

I know the standard advice is to wait until a company exits before exercising your share options because then you can exercise and sell in almost a single transaction and therefore know exactly what the cost of the investment is, the gain and whether it is even worthwhile.

Given that there is another round of investment to come and the rules for the share options scheme could be changed again I feel there is some advantage in exercising my options now (to get the paper shares and have them safe in my possession). Then I would sell them later after the company exits.

I actually asked the person who runs the share options scheme to go ahead with this plan but they told me it was not possible. This person and other senior people have since indicated that the tax implications to the individual are complicated and the tax burden would wipe out a lot of the benefit.

However, from all the information I have found about UK EMI schemes I would only be liable for Capital Gains Tax when I sell the shares and even that would be at a reduced rate. The only exception I can find is that if I was given a discount on the market price, but my understanding is that the strike price was the market value at the time.

There is a lot about this situation I don't understand and I am not sure the advice I have received is correct.

Would it be correct to say that the only tax due would be CGT on the difference between the strike price and market value when the options are exercised and then CGT again when you sell the shares at the end?

Answer 1

I have no qualifications, but I have been part of several EMI schemes.

Your option contract should state how you would go about excising the vested options. You may discover that there are additional secret agreements that the shareholders all have to agree to. However, you might want to get the person saying it's "too complicated" to explain it to you.

The options should have been granted at what was agreed with HMRC to be a fair value at the time of the grant.

If that's the case, then:

You will not have to pay Income Tax or National Insurance if you buy the shares for at least the market value they had when you were granted the option.

https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis

Also, CGT is only when you sell the resulting shares (assuming you ever can)

If you exercise your EMI option the capital gains cost of your shares is what you pay for them together with the amount charged to Income Tax, if any, on the exercise of your option.

From: https://www.gov.uk/government/publications/employee-share-and-security-schemes-and-capital-gains-tax-hs287-self-assessment-helpsheet/hs287-employee-share-and-security-schemes-and-capital-gains-tax-2019#enterprise-management-incentives-emis

However what you do have is an illiquid asset, which could cause problems, for example on death I don't know how inheritance tax would work - I assume it would be based on the nominal value at that time, even though the estate would be unable to sell the shares and so raise any money to pay the tax due.