AMV and UMV are two abbreviations that are frequently used in relation to employment related securities and play a key role in calculating the tax payable on exercising the shares, but what do they stand for?
AMV
AMV stands for actual market value and it refers to the value of the shares after factoring in any restrictions on them, such as limited trading periods or conditions attached to the exercise of options. Because of this, the AMV is usually lower than UMV since there are typically restrictions associated with EMI options.
UMV
UMV stands for unrestricted market value and it refers to the value of a share if it had no restrictions on it and could be freely traded on the market.
What is the AMV used for?
The AMV is important for setting the income tax point for the shares when they are exercised, so it is used to calculate the exercise price of the options. When companies issue EMI options, employees are granted the option to buy shares at a fixed price, known as the strike price. This price is based on the shares' value at the date of grant. In order to get the full tax benefits of EMI, you need to agree the price of the share option you are offering to employees with HMRC. This is because when the employee decides to exercise their share options to convert them into actual shares, they have to pay the strike price per share agreed with HMRC so they do not get taxed upon the exercise event. As such, you must get a valuation with HMRC first and we can help you with this.
Once you receive an approval letter from HMRC, which will confirm the AMV and UMV of the share, you can then use these to set the strike price. If the exercise price is set lower than the AMV, there are tax implications on the difference between the AMV approved by HMRC and the exercise price.
HMRC's guidelines state that if the exercise price is set the same, or above, the AMV the options can be exercised without incurring any tax.
What is the UMV used for?
For EMI options, the UMV is important for determining the maximum individual limit (£250,000) and the maximum company limit (£3m) of options that can be granted to an individual or the company's total equity value. The UMV is also sometimes used to calculate the taxable amount due when options are exercised. In normal circumstances, tax is not payable on the exercise of EMI options over restricted shares, but it may be payable if restricted shares are acquired at a discount or more than 90 days after a disqualifying event, in such cases tax is calculated on the increase in value after the disqualifying event and the UMV at the date of exercise plays a key role, in conjunction with S.431 Election.
AMV and UMV vs tax due
There are certain circumstances/disqualifying events that can lead to income tax and NIC charges, for example changes to the shares subject to the EMI option, changes to the option terms, loss of independence of the EMI company, or the employee ceasing to be employed or providing a minimum number of hours to the business. Failure to exercise EMI options within 90 days of certain "disqualifying events" can also lead to a part of the option gain being taxed at higher income tax/NIC rates. As an employer you can legally agree with employees to transfer your employer's portion of National Insurance Contributions (NIC) liability to the employee on certain shares and share options. This is known as a joint National Insurance Contributions (NICs) election. Read our Joint NIC Election guide here for more.
For unapproved options, the tax advantages are fewer than the EMI scheme, particularly for recipients. The Income Tax and Capital Gains Tax recipients of Unapproved options will pay on exercise depends on their circumstances, in particular where they’re located. Generally, on exercise, recipients pay income tax on the difference between the market value of the shares at the date of exercise, and the price paid for them - the strike price. You do not need a formal valuation with HMRC to determine the strike price; this is at the company’s discretion and it can be set at any figure from a share’s nominal value upwards. We see most companies set the exercise price at nominal value.
Conclusively, understanding the difference between AMV and UMV is crucial when it comes to calculating the tax payable on employment-related securities, especially in the context of EMI options. By taking into account the restrictions and conditions attached to the shares, the AMV ensures that the correct tax is paid when the shares are exercised, while UMV sets the limits on the number of options that can be granted to an individual or company.
At all times, your tax advisor or accountant will be best placed to discuss tax implications with you in more detail but we’re also happy to answer any general questions you may have so please reach out to your dedicated Options Scheme Owner directly or via our live chat with any questions, as well as any feedback on this guide.