February 07, 2022

Article

The Enterprise Management Incentive, or EMI, share option scheme is one of the most popular employee option schemes for private companies as it provides significant tax benefits in a relatively simple structure. As with any tax advantaged scheme there are many rules and conditions to be met. It is always advisable to get proper advice before implementing a scheme, but the details below are designed to give a general overview of what is involved.

Overview

EMI’s are share options, that is the right to acquire shares in the employer company at a future date, normally dependant on certain conditions being met. The use of EMI schemes varies, but perhaps the most common structure allows an employee to benefit from the future sale of a company after it has grown in value. The grant and exercise of the option are tax free, and the sale of the shares are subject to Capital Gains Tax, potentially attracting tax at 10% under Business Asset Disposal Relief, on gains up to £1 million.

Qualifying Conditions

Only trading companies can issue EMI options, and certain trades are excluded. We can advise further in specific circumstances, but banking, finance, professional services, farming, hotels, and other land-based businesses do not qualify. In cases of doubt HMRC will give clearance that a company’s trade qualifies for the relief. The other main conditions include the following.

  • The company may not be a subsidiary in a group and there are conditions regarding the activities of other group members.
  • The company’s gross assets must be less than £30 million
  • The company must have less than 250 employees
  • The company must have a UK permanent establishment.
  • The company may not issue more than £3 million worth of options, based on the value at date of grant.
  • An employee must be employed by the group and work at least 25 hours per week or 75% of their working time.
  • An employee must have less than a 30% interest in the company.
  • EMI Options must be in the form of a written option agreement and be capable of exercise within 10 years of grant.
  • EMI options are granted to individual employees and there is no requirement for the scheme to apply to all employees, which gives flexibility in providing different terms for different individuals.
  • EMI options cannot be issued for tax avoidance reasons, there must be a commercial need to recruit or retain the individuals concerned.
  • Up to £250,000 of options can be granted to each employee. Furter options can then not be issued to that person for three years.

Tax Benefits

Without a special scheme, an employee who acquires shares at less than their market value pays income tax, and possibly National Insurance, on the difference between the price paid and the market value when the option is exercised. EMI options alter this rule so that the employee only pays tax on the difference between the price paid and the market value at the date of grant. Normally the exercise price is set as the market value at date of grant, so no tax charge arises. Employees are unlikely to exercise their options unless the share value has increased so this is a valuable benefit.

The subsequent sale of the shares is subject to capital gains tax. Shares acquired through an EMI option normally qualify for Business Asset Disposal Relief immediately without the need to hold 5% interest in the company, so that on sale of the shares the employee should only pay 10% tax on lifetime gains of up to £1 million.

The employer also gets a tax benefit by way of a deduction for corporation tax based on the value of the shares issued when an employee exercised their option.

There are other ways to provide share-based employee incentives so, whether you qualify for EMI options or not, please speak to your usual contact at Albert Goodman or email Andrew.Law@albertgoodman.co.uk.

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