ETASSUM57060 | Enterprise Management Incentives (EMI): Taxation of EMI options: Charge on exercise of an option following a disqualifying event

Section 532 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

If the exercise of an option takes place more than 90 days (40 days prior to 17 July 2013) after a disqualifying event, the exercise is liable to tax. Income tax (and National Insurance, where the shares are readily convertible assets) is charged on the amount by which the market value at the date of exercise exceeds the market value immediately before the disqualifying event.

Example

Exercise of an option more than 90 days (40 days prior to 17 July 2013) after a disqualifying event where option is granted at market value

A 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 £5.

The market value of a share immediately before a disqualifying event is £9.

The market value on the date of exercise is £25.

The difference between the market value immediately before the disqualifying event and the exercise price is exempt from income tax but liable to Capital Gains Tax (£9 - £5) x 1000 = £4,000.

The amount liable to income tax and national insurance contributions is limited to the growth in value after the disqualifying event (£25 - £9) x 1,000 = £16,000.