HMRC Enterprise Management Incentive (EMIs) options are tax advantaged share options

What does it do?

They are designed to help small, higher risk companies recruit and retain employees who have the skills to help the company grow and succeed. They are also a way of rewarding employees for taking a risk by investing their time and skills to help small companies achieve their potential.

Who is it for?

EMI is intended for smaller companies only and there are a number of restrictions that companies need to be aware of.

To qualify companies must have gross assets of no more than £30 million, fewer than 250 full time employees and have a permanent establishment in the UK. Certain types of businesses are excluded including dealing in land, financial trading, leasing and property development amongst others.

Also the company must be independent – it must not be a subsidiary of or controlled by another company.

An EMI is intended to allow the company to provide key employees with the opportunity to participate although this can be widened to all employees provided that the scheme’s various rules are complied with.

To be eligible to participate as an employee they must work for the company for at least 25 hours a week, or if less, for at least 75% of their working time.

Anyone holding 30% or more of the company’s ordinary shares won’t be eligible to participate.

How does it work?

There is a company limit of £3million on the total value of shares (as at the grant date) that may be available under EMI options at any given time.

There is also an individual limit of £250,000 on the value of shares (as at the grant date) that any one employee may hold under the EMI option.

Although prior HRMC approval is not needed to grant EMI options, it will need notified of any such grants within 92 days of the grant.

Employees are selected at the discretion of the employer. These employees are granted an option to purchase company shares worth up to £250,000. Employees pay a fixed price per share if they decide to exercise the option and buy the shares.

Normally an employee would have to pay income tax and possibly NI on any gain made between the granting of and exercising of the option – even though it may only be a paper gain if the employee hasn’t yet sold the shares.

However with an EMI no income tax or NICs will be payable when an employee exercises the share option.

The EMI share option will rise in value if the share value rises above the price set when the option is granted. Employees must be able to exercise EMI share options within 10 years.

When shares acquired through exercise of EMI options are eventually sold, capital gains tax (CGT) will be due on the option gains (the amount by which the sale price exceeds the exercise price).

CGT is normally payable at 18% or 28%, but if certain criteria are met it may be possible to qualify for Entrepreneurs’ Relief on this gain and be taxed at a flat rate of 10%.

It is possible to structure the EMI so that specific performance criteria must be achieved in order for the option to be exercised.

What happens if the value of shares doesn’t increase?

There is no obligation on the employees to exercise their option. If the share price were to remain static or fall in value the employees would probably decide not to exercise their option as there would be little benefit in doing so.

Any benefits to the company?

Yes. The employer should be able to make a corporation tax deduction for any gains made when the options are exercised by employees.

Why should we choose it?

An EMI can provide your key employees with a financial reward where value is directly determined by business success and which may be taxed at a significantly lower rate than a cash bonus would be.

The EMI can encourage commitment from your key employees as you can ensure they may only exercise their option if they stay with the company.

From the employee perspective there is little risk until they exercise the option.

Does this create immediate ownership?

No. The option might not be exercised due to no real increase in value, or due to the performance targets not being met. As a result the employee wouldn’t be a shareholder.

How can we help?

If you are exploring employee share schemes, we can help you to identify the most appropriate scheme to suit your objectives. We have a track record of establishing schemes and explaining the benefits to employees. We are happy to meet at client’s offices, or at our London office, without charge or future obligation. Please contact us for an initial discussion.