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What are the tax advantages?

A normal share option scheme will result in an income tax charge arising to employees on the exercise of their options. The amount subject to income tax is the difference between the market value of the options at the date of grant (any difference between this value and the strike price would have been taxable at the time of grant) and the market value of the shares at the date of exercise. An EMI option will only result in an income tax charge where the strike price is less than market value at the date of grant, as referred to above. The difference between strike price and the market value of date of exercise is not taxed at all on exercise. Employees will only be taxable on this amount when they sell the shares they acquired under the EMI options and it is highly likely they will qualify for entrepreneurs relief (even where they hold less than 5% of the company) giving a tax rate of 10%, which compares very favourably to the 40%/45% rate applying to normal share option schemes.

Entrepreneurs’ Relief on any gain when the options are exercised will not normally be available unless the shares are held for at least a year. Given that they are normally exercised only on a sale, this will make them ineligible.

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