ETASSUM57040 | Enterprise Management Incentives (EMI): Taxation of EMI options: Charge on the exercise of an option where the shares are free

Section 531 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

Income tax is charged if the employee does not pay anything for the shares when he exercises the option. The charge is on the market value of the shares at the time the option was granted, or if lower, the market value of the shares at the time the option is exercised.

Example 1

Exercise of option where shares are free and when shares increase in value

Option granted at no cost

B is granted an option to acquire 1,000 shares.

The market value of each share at the date of grant is £5.

The exercise price is nil.

Market value on exercise is £15

The income tax charge is on the discount (market value at date of grant less the exercise price) £5 x 1,000 less £0 = £5,000 (amount of discount).

Example 2

Exercise of option where shares are free and when shares decrease in value

As above but

Market value on exercise is £3

The income tax charge is on the market value at exercise (because it is lower than the market value at date of grant) £3 x 1,000 = £3,000.