Employee Share Schemes & CGT

Key facts

EMI options can qualify for the 10% Business Asset Disposal Relief rate (on gains up to £1 million lifetime).
CSOP options are not taxed on grant or exercise — CGT only applies when the shares are eventually sold.
SIP shares held for 5+ years are completely free of Income Tax and National Insurance; CGT applies on gains above the base cost.
SAYE (Save As You Earn) options are not subject to Income Tax or NIC on exercise — CGT applies on any later disposal.
For unapproved options, Income Tax is charged on the difference between market value and exercise price at exercise; CGT then applies on any further gain when shares are sold.

Overview of Employee Share Schemes

Many UK employers offer share schemes that allow employees to acquire shares in the company at favourable terms. HMRC recognises four types of tax-advantaged (approved) share scheme, each with specific CGT rules:^[1]

Scheme	Full Name	Typical User
EMI	Enterprise Management Incentives	Small companies (fewer than 250 employees, gross assets under £30m)
CSOP	Company Share Option Plan	Any company — often used by larger firms
SIP	Share Incentive Plan	All-employee plan — must be open to all employees
SAYE	Save As You Earn (Sharesave)	All-employee plan with savings contract

Shares may also be acquired through unapproved (non-tax-advantaged) arrangements, which have less favourable tax treatment.

EMI: Enterprise Management Incentives

EMI is the most tax-efficient share scheme for qualifying companies. It is available to independent trading companies with gross assets of no more than £30 million and fewer than 250 full-time equivalent employees.^[2]

CGT Treatment of EMI Options

Grant: No Income Tax or CGT charge when the option is granted (provided the exercise price is at least equal to the market value at grant, or the market value agreed with HMRC)
Exercise: No Income Tax charge on exercise if the exercise price equals the market value at grant. If the exercise price is below market value at grant, Income Tax is charged on the discount
Sale: CGT applies on the difference between the sale proceeds and the market value at grant (or exercise price, whichever is higher)

BADR on EMI Shares

EMI shares qualify for Business Asset Disposal Relief (BADR), which taxes qualifying gains at 10% instead of the standard 18%/24%. Key conditions:^[2]

The option must have been granted at least 2 years before the disposal
The shares must be sold within 2 years of the option being exercised (if the option was granted before 6 April 2013, this condition does not apply)
The company must be a qualifying trading company at the time of disposal
There is no requirement to hold 5% of the company’s shares (unlike standard BADR)
The £1 million lifetime limit for BADR applies

Worked Example: EMI with BADR

Claire is granted an EMI option over 10,000 shares at £1.00 per share (the agreed market value at grant). Three years later, she exercises and immediately sells the shares for £5.00 each:

Item	Amount
Sale proceeds (10,000 × £5.00)	£50,000
Less: exercise price (10,000 × £1.00)	−£10,000
Gain	£40,000
Less: Annual Exempt Amount	−£3,000
Taxable gain	£37,000
CGT at 10% (BADR)	£3,700

Without BADR, Claire would pay £8,880 at the 24% higher rate — a saving of £5,180.

CSOP: Company Share Option Plan

CSOP options can be granted by any company (subject to qualifying conditions). Each employee can hold options over shares worth up to £60,000 at the date of grant.^[1]

CGT Treatment of CSOP Options

Grant: No Income Tax or CGT charge
Exercise: No Income Tax charge, provided the option is exercised 3–10 years after grant and the exercise price was at least market value at grant
Sale: CGT applies on the gain above the exercise price

Worked Example: CSOP

Mark is granted CSOP options over 5,000 shares at £4.00 per share. He exercises 4 years later when the shares are worth £8.00, then sells at £10.00:

Event	Income Tax	CGT
Grant (exercise price = £4.00)	Nil	Nil
Exercise (MV = £8.00)	Nil (approved scheme, 3–10 years)	Nil (no disposal)
Sale at £10.00	Nil	On £6.00/share (10.00 − 4.00)

Mark’s total gain is 5,000 × £6.00 = £30,000. After the £3,000 AEA, his taxable gain is £27,000, taxed at 18% or 24% depending on his income.

Note: If a CSOP option is exercised before the 3-year minimum holding period, it loses its tax-advantaged status. Income Tax will be charged on the exercise gain (market value at exercise minus exercise price), and the shares are treated as if acquired through an unapproved arrangement.

SIP: Share Incentive Plan

SIPs are all-employee plans that must be offered to all eligible employees on the same terms. They allow employees to acquire shares in four ways:^[1]

SIP Element	Annual Limit	Tax Treatment
Free shares	£3,600	Tax-free if held 5+ years in the plan
Partnership shares	£1,800 or 10% of salary	Bought from pre-tax salary; tax-free if held 5+ years
Matching shares	2:1 ratio to partnership shares	Tax-free if held 5+ years
Dividend shares	£1,800 reinvested dividends	Tax-free if held 3+ years in the plan

CGT on SIP Shares

The CGT treatment depends on how long the shares are held in the plan:

Held 5+ years: No Income Tax or NIC on removal. The base cost for CGT is the market value on the date of removal from the plan
Held 3–5 years: Income Tax and NIC charged on the lower of the value at award or the value at removal. The base cost for CGT is the value on which Income Tax was charged
Held less than 3 years: Income Tax and NIC charged on the market value at removal. The base cost for CGT is that same market value

Tip: The 5-year holding period makes SIP shares extremely tax-efficient. If you acquire £3,600 of free shares each year and hold them for 5 years, the entire value is free of Income Tax and NIC. Only gains after removal from the plan are subject to CGT.

SAYE: Save As You Earn (Sharesave)

SAYE schemes combine a savings contract (3 or 5 years) with share options granted at a discount of up to 20% below market value at the date of grant.^[1]

CGT Treatment of SAYE

Savings contract: Interest (or bonus) on the savings is tax-free
Exercise: No Income Tax or NIC charge on exercise, even though the option price may be at a 20% discount to the grant-date market value
Sale: CGT applies on the difference between the sale proceeds and the option exercise price

Worked Example: SAYE

Lisa joins an SAYE scheme. The share price at grant is £10.00, and the option price is set at a 20% discount: £8.00. She saves £250 per month for 3 years (£9,000 total) and uses the savings to exercise options over 1,125 shares at £8.00 each. She sells immediately at £14.00:

Item	Amount
Sale proceeds (1,125 × £14.00)	£15,750
Less: exercise price (1,125 × £8.00)	−£9,000
Gain	£6,750
Less: Annual Exempt Amount	−£3,000
Taxable gain	£3,750

Unapproved (Non-Tax-Advantaged) Options

Shares acquired through arrangements that do not qualify under one of the four approved schemes are taxed less favourably:^[3]

Exercise: Income Tax and NIC are charged on the difference between the market value at exercise and the exercise price (the “exercise gain”)
Sale: CGT applies on the difference between the sale proceeds and the market value at exercise

The market value at exercise becomes the base cost for CGT — this avoids double taxation on the amount that has already been subject to Income Tax.

Important: With unapproved options, the combined effective tax rate can be significant. For a higher-rate taxpayer, Income Tax at 40% plus employee NIC at 2% applies to the exercise gain, followed by CGT at up to 24% on any further increase in value before sale. Employer NIC at 13.8% is also due on the exercise gain (paid by the employer, though this may be passed on contractually).

Frequently Asked Questions

Do I pay CGT when I exercise my share options?

For approved schemes (EMI, CSOP, SAYE), exercising the option is not normally a CGT event. You pay CGT only when you sell the shares. For unapproved options, Income Tax is charged at exercise on the “exercise gain” (market value minus exercise price), but CGT only applies later when you dispose of the shares.

Can I get the 10% BADR rate on my EMI shares?

Yes. Shares acquired through a qualifying EMI option are eligible for Business Asset Disposal Relief (BADR) at 10%, provided you exercise the option and sell the shares at least 2 years after the option was granted. The normal requirement to hold 5% of the company does not apply to EMI shares.

What happens if I leave my employer before exercising options?

It depends on the scheme rules and the reason for leaving. Many schemes allow “good leaver” provisions (retirement, redundancy, ill health) that let you exercise within a limited period after leaving. “Bad leavers” (voluntary resignation) may lose their options entirely.

What is my base cost for CGT on SIP shares?

If you hold SIP shares for 5 or more years, the base cost for CGT is the market value on the date the shares are removed from the plan. If removed before 5 years, Income Tax and NIC are charged on the value at removal, and the base cost for CGT is that same value.

Sources

Tax and Employee Share Schemes — GOV.UK
Enterprise Management Incentives — GOV.UK
Employment Related Securities Manual: ERSM — HMRC
Capital Gains Manual: CG56400 – Employee share schemes — HMRC