ETASSUM54100 - Enterprise Management Incentives (EMI): Requirements relating to options: Changes to grant of options from 6 April 2023 - Examples of apportionment

Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

Below are some examples of how apportionment may be determined in cases where bringing options into the scope of EMI has resulted in a maximum entitlement or threshold being exceeded.

Example 1

Mr A was granted £200,000 worth of EMI options in January 2020 by his employer, Company B. Although he satisfied the working time requirement of EMI schemes, he did not sign a working time declaration.

In January 2021, this error was identified and Company B understood that this meant that the EMI options granted to Mr A in January 2020 were not qualifying EMI options.

To rectify this, they granted a further £200,000 of new EMI options to Mr A. He also retained his original options (granted in January 2020) but accepted that he would not benefit from any tax advantages in relation to them.

At 6 April 2023, the requirement for an employee to sign a working time declaration was removed for Mr A’s options granted before 6 April 2023 which have not yet been exercised.

Therefore, all of Mr A’s EMI options in this example (granted in January 2020 and January 2021) are now capable of being qualifying EMI options.

However, the total value of the options (£400,000) has exceeded the maximum individual entitlement of £250,000 (under Paragraph 6, Schedule 5 of ITEPA 2003).

There is a company takeover in September 2023 and the share options are exercised. In carrying out due diligence, Company B identifies that the January 2020 options have been brought into scope of EMI. They must make arrangements on or before 6 July 2024 to determine which options, or extent of those options, will be within the maximum and qualify as EMI options.

Company B can choose how to make this apportionment.

Company B determines that the original EMI options, granted in January 2020, have made the largest financial gain. It therefore decides to apportion the options as follows:

January 2020 options = £200,000 qualifying EMI options

January 2021 options = £50,000 to be qualifying EMI options, £150,000 to be non-qualifying share options

Example 2

Ms A was granted £100,000 worth of EMI options in July 2020 by her employer, Company B. There were some restrictions attached to the shares and, although these were contained in the Articles of Association, Company B did not set out the details of them in the option agreement for Ms A.

In July 2021, Company B became aware of this error and believed that this meant that the EMI options granted to Ms A in July 2020 were not qualifying EMI options.

To rectify this, they granted a further £100,000 worth of EMI options to Ms A in July 2021. She also retained her original options, granted in July 2020.

Company B granted a further £100,000 worth of EMI options to Ms A in July 2022.

The options granted in July 2021 and July 2022 fully complied with all requirements of an EMI scheme.

From 6 April 2023 the requirement for an employer company to set out the details of the restrictions to the option holder is removed, and this also applies to options granted before 6 April 2023 which have not yet been exercised.

Therefore, all of Ms A’s EMI options in this example (granted in July 2020, July 2021 and July 2022) are now capable of being qualifying EMI options.

However, the total value of these options (£300,000) exceeds the maximum individual entitlement of £250,000 (under Paragraph 6, Schedule 5 of ITEPA 2003).

There is a company takeover in January 2024 and the share options are exercised. Company B identifies that the July 2020 options have been brought into scope of EMI. They must make arrangements on or before 6 July 2024 to determine which options, or extent of those options, will be within the maximum and qualify as EMI options.

Company B can choose how to make this apportionment, and in this example chooses to do so as follows.

July 2020 options = £100,000 qualifying EMI options

July 2022 options = £100,000 qualifying EMI options

July 2021 options = £50,000 to be qualifying EMI options, £50,000 to be non-qualifying share options

As demonstrated, the company is free to make this apportionment in its chosen order, and it is acceptable to do so in a manner that will achieve the most favourable outcome for the option holder.

Example 3 – Automatic apportionment

If the employer company fails to make arrangements to determine which of the relevant EMI options, or extent of those options, will be within the maximum, then they will be determined in the chronological order in which the options were granted.

The same circumstances as described in Example 2 will be used to demonstrate the potentially different results if the apportionment is to be made in chronological order.

Ms A was granted EMI options worth £100,000 in July 2020, £100,000 in July 2021 and £100,000 in July 2022. The July 2020 options were reviewed in July 2021 and considered to be non-qualifying options for EMI purposes due to the fact that Company B had failed to set out the details of restrictions attached to the shares.

From 6 April 2023, the requirement for an employer company to set out the details of the restrictions to the option holder is removed, and this also applies to options granted before 6 April 2023 which have not yet been exercised.

Therefore, all of the options in this example are now capable of being qualifying EMI options, although the maximum individual entitlement of £250,000 (under Paragraph 6, Schedule 5 of ITEPA 2003) has been exceeded.

There is a company takeover in January 2024 and the share options are exercised.

Company B fails to make arrangements to determine which of the EMI options, or extent of those options, will be within the maximum entitlement.

Therefore, the apportionment is made in chronological order, as follows.

July 2020 options = £100,000 qualifying EMI options

July 2021 options = £100,000 qualifying EMI options

July 2022 options = £50,000 to be qualifying EMI options, £50,000 to be non-qualifying share options

Example 4

Mr A and Ms B both work for Company C.

In April 2018, Company C granted Mr A and Ms B £50,000 of EMI options each.

It later transpired that in relation to the options granted in April 2018, Mr A and Ms B had not signed working time declarations and therefore the options did not qualify for EMI tax advantages.

In April 2022, Company C granted options of varying amounts to some of their employees, including further options to Mr A and Ms B, which total £2,950,000 in value. All of the options granted in April 2022 are qualifying options for the purposes of EMI.

From 6 April 2023, the options granted in April 2018 are now capable of being qualifying EMI options. However, the threshold (in paragraph 7(1) of Schedule 5 ITEPA 2003) which limits the total value of unexercised qualifying options in the company to £3 million, would be exceeded.

Therefore, on or before 6 July following the end of the first tax year in which one of the relevant options are exercised, Company C must make arrangements to determine which of the options, or extent of those options, will be within the maximum limit and qualify as EMI options.

Company C makes an arrangement to determine which options will qualify by apportioning the options as follows:

Mr A: £25,000 EMI options/£25,000 non-qualifying options

Ms B: £25,000 EMI options/£25,000 non-qualifying options

Example 5 – arrangements to protect current position

An employer company may wish to make arrangements to protect the current position that they were in prior to the changes introduced from 6 April 2023.

This can be done on or before 6 July following the end of the first tax year in which the first relevant option is exercised. The options do not have to have been exercised before the employer company makes the arrangements.

For example, Mr A was granted £250,000 worth of EMI options by Company B, his employer, in July 2019. In July 2022, Company B realised that they had not set out the relevant restrictions attached to the shares to Mr A, and they believed the options to now be non-qualifying for EMI purposes.

To rectify this, they granted Mr A a further £250,000 worth of EMI options in July 2022.

Following the changes from 6 April 2023, all of the options are now capable of being qualifying options for EMI purposes.

There is no current prospect of an event that would lead to Mr A being able to exercise his EMI options. However, Company B wishes to clarify the position that they believed that they were in and makes arrangements to determine the following position:

July 2019 options = £250,000 non-qualifying EMI options

July 2022 options = £250,000 qualifying EMI options