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bigduckontax, Accountant
Category: Tax
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I left my employer 11 weeks ago and exercised my share

Customer Question

Hello. I left my employer 11 weeks ago and exercised my share options. Approx. 90% of the shares I exercised have EMI status with the other 10% being ordinary non EMI-status shares. I need to understand the tax implications of electing for a section 431 to treat all restrictions as lifted. Looking at HMRC's information here, I am led to believe that the there may be a higher chargeable gain for electing a section 431.
Alasdair Cross
Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
Here is Taylor Wessing's summary of the tax position on sale of EMI shares; there is no Income Tax (IT) or National Insurance (NI)due on the grant of such shares. On disposal, however, Capital Gains tax (CGT) kicks in as follows:
'On the disposal of any shares acquired pursuant to the exercise of an EMI option there will be a charge to Capital Gains Tax on the difference between the disposal proceeds less the aggregate of the exercise price of the Option.
The employee can use their CGT annual allowance (£11,100 for the tax year 2015/16) so that only gains in excess of this amount will then be subject to CGT at the flat rate of 28% for higher rate taxpayers. If an employee pays income tax at the basic rate and his income and gains do not exceed the higher rate threshold, CGT will be payable at the flat rate of 18%.
If an EMI option holder satisfies the one year holding requirement between the grant of the EMI option and the disposal of the shares acquired on exercise of the EMI option, an extension to the entrepreneur's relief rules means the relief may be available to reduce the rate of capital gains tax payable to 10% for gains up to a lifetime limit of £10million.'
So you see if you can hold off for a year, or if a year has already passed since the grant, the rate of CGT can be substantially be reduced.
For the other shares, presuming that it is a Company Share Option Plan the grant of the option attracts no IT or NI consequences.
On sale there would be a CGT liability, but as it is normal practice for such shares to be sold on the day of vesting there is no capital gain to tax.
Bird and Bird comment:
'Alternatively, participants can make an election pursuant to section 431(1) ITEPA 2003 to pay income tax on the "unrestricted market value" of the shares within 14 days of acquisition with the result that subsequent gains are taxed as capital. Participants do not usually make such elections,'
I do hope hat I have covered the problem for you.
Customer: replied 3 years ago.
Hello BDT
Thanks for your quick reply. This is helpful. What I forgot to explain was...
- My previous employer has not yet gone public (Expected US IPO in the next 18 months).
- The grant of the EMI shares was Mar. 2012
- My previous employer has asked me to sign the S431 election form however I do not understand the implications of this on my EMI status shares. more info here:
Does this still apply to me seeing as the shares are not yet tradeable on an exchange?
As far as I can work out, I would have limited liability for CGT according to formula on this page you confirm please? May be easier if we could have a quick conversation on the phone...
Many thanksAlasdair
07740 051498
Expert:  bigduckontax replied 3 years ago.
Telephone is all but impossible Alistair as I am in a time zone 7 hours ahead of the UK. I will accordingly opt out and see if another expert can assist.