Enterprise Management Incentive (EMI) share options have been around for over a decade, allowing small higher risk businesses retain employees and grow the business by offering an equity stake in the company.
How do they work?
If the employer were to simply give their employee shares in the company, the market value of those shares would count as earnings, leaving the employee with a potentially large tax bill. EMI options are used to give the employee the right to obtain shares in the company in the future, deferring the income tax charge, not just until the options are exercised, but when the shares are sold.
EMI options have been very popular due to several reasons. They provide excellent tax efficiencies for both the employee and the employer. Employees get income tax and NIC relief on the shares until they are sold and when they are, the gains will only be subject to the much more lenient capital gains tax. In addition to this, 2 favourable new rules were passed in the 2012 budget.
- The first allows the individual to access entrepreneurs’ relief at the enticing rate of 10% (compared to 28%), as long as the exercised shares are held for at least 12 months and the employee remains with the company for this time.
- The second has increased the maximum share value (when the options are awarded) from £120,000 to £250,000; a sizeable stake in many businesses.
Employers on the other hand are allowed to deduct an amount equivalent to the gain made (by employees exercising the options), against company profits. This gives the company an opportunity to considerably reduce their corporate tax bill without spending any cash.
Flexibility is another significant benefit and EMI options can be awarded with very specific rights at the discretion of the employer.
Lastly are the relatively low setup costs when compared to other HMRC approved schemes, which makeup this a very appealing package. However, there are certain conditions that both parties need to comply with.
- must carry on one or more ‘qualifying trades’. (Most media and entertainment companies should qualify)
- have no more than £30 million gross assets & 250 employees
- not be under the control of another company
- they must work for the company at least 25 hours a week (or 75% of their working time)
- they must exercise options within 10 years of the issue date
- the value of the options cannot exceed £250,000
There are quite a few employee share schemes out there, all of which have their pros and cons. Provided you meet the criteria, EMI share options offer excellent tax efficiency, rewarding both key staff and the company. All qualifying companies should at least consider EMI’s when planning for the future of their business and retaining the key employees to get them there.
Next month we will be looking at the Share Incentive Plan as part of a share scheme series.