ACCA Advanced Taxation (ATX) Practice Exam

In what scenario do EMI options incur an income tax charge?

1. If options are issued at market value

2. If options are granted at a discount

3. If options are sold before exercise

4. If options are held for less than 12 months

The correct answer is: If options are granted at a discount

EMI (Enterprise Management Incentive) options are a type of share option granted to employees that come with specific tax advantages under UK tax law. One of the key features of EMI options is that they can be granted with a market value exercise price, which generally means that there will be no income tax charge at the point of grant or exercise, provided that specific conditions are met. When EMI options are granted at a discount, meaning the exercise price is lower than the market value of the shares at the time the options are granted, an income tax charge may arise. This is because receiving an option at a discount effectively provides the employee with a financial benefit at the point of grant, and this benefit is considered taxable income. Thus, if options are granted at a discount, it will create a taxable event, incurring an income tax charge when the employee exercises the options. This reflects standard tax practice that any benefit received in the form of a discount on share options is treated as earned income and subject to income tax. On the other hand, granting options at market value does not incur an income tax charge, selling options before exercise does not create a taxable charge under EMI provisions, and simply holding options for less than 12 months does not automatically lead to