Whilst there are many ways of incentivising and retaining key employees, the Enterprise Management Incentive (EMI) scheme remains one of the most tax efficient ways to do this because of the very generous tax reliefs associated with the scheme. In addition, these schemes are entirely flexible and gives the employer complete discretion over which of their employees are invited to join the scheme, and what the conditions for these being offered are – for example, time or achievement-based targets, making them a practical solution for larger and smaller companies alike.
How are EMI options taxed?
The main benefit of EMI for the employee is that there will be no income tax or National Insurance Contributions (NIC) charged when a Grant is made, and providing the Options are Exercised with a strike price of no less than the market value at the time of the Grant, there will be no income tax due at the point of Exercise either.
If the strike price is lower, then income tax and NIC will be payable in the same way as they are on other employee share schemes.
When the shares are sold by the employee at a later date, Capital Gains Tax (CGT) at a rate of 20% is paid on the growth. Providing the duration between acquiring the Options and the final sale is at least 24 months, the employee should qualify for Business Asset Disposal Relief (BADR) and CGT at the reduced rate of 10%.
Once the employee Exercises their options, the company can claim corporation tax relief on the difference between the market value of the shares at that point and the option price that has been paid.
There is a process that will enable the company to obtain advanced assurance from HMRC that the company is eligible, and also to agree the value in advance of the Grant being made, leaving no nasty surprises later for either party.
Who is eligible?
Since the scheme was introduced in 2000, there have been a number of changes and the current conditions (July 2023) for eligibility include:
For The Company:
- Can be listed or unlisted.
- Must have gross assets of £30m or less.
- Must have no more than 249 full-time equivalent employees (this is the total for the whole group if the company is part of a qualifying group)
- Must limit the total value of options granted under EMI to £3m.
- Must issue options over ordinary shares.
- Must be undertaking a qualifying trade – certain businesses will not qualify, for example, investment companies, property companies, financial institutions etc.
- Must have a Permanent Establishment (PE) in the UK, or a subsidiary with a UK PE.
For The Employee:
- Must work at least 25 hours a week or 75% of their total working time for the company or qualifying group company.
- Cannot be granted more than £250,000 worth of shares in a three-year period.
- Cannot hold more than 30% of the total share capital.
What next?
If you would like to discuss EMI further, the Gravita Tax team would be delighted to arrange an initial call with you to discuss your how your EMI Options will be taxed or to assist in arranging a scheme for you and your Company. Please contact Michaela Lamb or Toby Hermitage.
