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TonyTax
TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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The company in which i hold EMI share options has

Resolved Question:

Hello
The company in which i hold EMI share options has notified me of an 'exit event' planned next week, and as such i confirming the exercise of my options.
The company advises me that the EMI share options qualify for Entrepreneur's relief on the gain between exercise price & value. As i understand it, this is 10% rather than the 28% higher rate CGT.
My concern is that I thought the options had to be exercised 1 year before any exit event in order to qualify for ER. is this correct? The EMI options are only to be exercised on an exit, so it would have been impossible to do 1 year ago.
The company maintains that 10% CGT will be applied, but it is attaching a clause in the SPA which indicates HMRC may review the arrangement and i would be liable if they found the award to be invalid.
All of the documentation stacks up, genuine EMI options, HMRC approval for the valuation of the shares at grant, no disqualifying events - it's the application of ER which is confusing me.
Thanks
Stuart
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.

Hi.

Can you tell me what the nature of the "exit event" is and when exactly the EMI share options which you have to exercise were granted to you.

Customer: replied 1 year ago.

Hi

Sorry for delay, but i was out briefly.

The exit event is a sale of 100% of the share capital of my current UK employer. I was granted HMRC EMI options in July 2013 & so the 12 month qualification period is no problem. The issue for me is understanding the relationship between the grant (July 2013), exercise (now), exit (next week) and Enterpreneur's relief/CGT.

Any advice you can give would be welcome.

Thanks

Expert:  TonyTax replied 1 year ago.
Thanks.

Leave this with me while I draft my answer.
Expert:  TonyTax replied 1 year ago.
Hi again.

The exit event which in your case is a takeover of your employer company is a disqualification event.

For the purposes of entrepreneurs' relief, the holding period is deemed to start on the date that the option to buy shares was granted, not when the option is exercised and the shares acquired. So long as you actually exercise the options as opposed to being given cash to renounce your options and that exercise takes place within 90 days of a "disqualifying event", you will be able to claim ER when you sell the shares and pay tax at 10% instead of one of or a combination of the regular CGT rates of 18% and 28%.

Take a look here and here (see example) for confirmation that the date of grant of the option is the start point for the 12 month holding period as opposed to the date the option is execrcised and here for confirmation that you have 90 days after a disqualifying event to exercise the EMI options and retain the tax advnatages.

I hope this helps but let me know if you have any further questions.
Customer: replied 1 year ago.

Hi

That's very useful and informative. Thank you. If i may just ask one more question before closing/rating:

The 'disqualifying event' would i guess be the completion of the sale (loss of independence), so i have been given notice to exercise my options at 5pm before the date of completion next week, with the company loaning me the money to pay the exercise price at a sensible rate of interest & taking repayment from the proceeds within a day or two.

I accept that the 90 day claim on ER would apply regardless (thanks for confirming that) but would the exercise before the completion not mean that there was no disqualifying event at all - that is what we are being told at least.

Appreciate the advice, and will close/rate following your reply.

Stuart

Expert:  TonyTax replied 1 year ago.
That's correct.

The disqualifying event triggers the 90 day grace period. You have to exercise regardless because of the takeover so its a moot point really.
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15754
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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