The Enterprise Management Incentive scheme (EMI) is one type of employee share scheme which provides generous tax favoured treatment. Such schemes are the most common form of share plans for start-up companies and SMEs. From an employer’s perspective, it is a non-cash approach to incentivise and motivate key employees to make the business a success. The objective of the scheme is to retain talented staff and it seems there is significant evidence to suggest the scheme fulfils its purpose.
Typically, in order to qualify to grant EMI option shares, a company must, amongst other things, be trading independently with gross assets of not more than £30 million and have fewer than 250 full-time employees. On the other hand, the EMI option holder must be an employee of the company who works at least 25 hours or, if less then, 75% of their working time. They also cannot have a material interest in the company.
What are the tax advantages of an EMI scheme?
Let us suppose an employee, Andy, is granted an option to acquire 1,000 shares in his employing company, ABC Ltd, at its market value of £5.00 per share, upon a sale of shares in the company. Three years later, an offer is made for the share capital in ABC Ltd with the purchaser proposing to pay £10.00 per share. Andy’s options are now capable of being exercised as a sale is imminent. Therefore, he acquires 1,000 shares at £5.00 per share totaling £5,000 and immediately sells those shares to the purchaser for the purchase price of £10.00 per share and receives £10,000. Clearly, Andy has benefitted and will need to account for the gain he has made. The beauty of the EMI route is that Andy will pay no income tax or national insurance contributions and will instead pay capital gains tax at a much lower rate – the current income tax rates can be as high as 45% whereas the current capital gains rate is 20% and even that is bolstered by a myriad of exemptions and allowances.
Notwithstanding the generous tax treatment above, Andy may also qualify for Business Asset Disposal Relief and, therefore, generate further tax relief.
From an employer’s perspective, the cost of setting up the EMI scheme can be offset and any gains made on the shares from the date the agreement was signed to the date the options were exercised by the employee will also be deductible from the company’s taxable income for corporation tax purposes.
Introducing an EMI option scheme?
Here is a list of some considerations to bear in mind:
(1) Does the company qualify?
(2) Do the employees qualify?
(3) How much are the shares currently worth on the market?
(4) In what circumstances should the options be exercisable?
If you want to discuss EMI share option schemes further for your business please feel free to get in touch with someone from our corporate team who would be happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.
The information contained in this article is for information purposes only and is not intended to constitute legal advice.