In recent years, many companies have implemented employee share schemes as a way of incentivising key employees. The most common type of share scheme implemented has been the Enterprise Management Incentive Scheme (EMI Scheme) as this H M Revenue & Customs approved share scheme offers both flexibility and tax advantages to both the company and the employee.  

There have been a number of recent changes to the EMI Scheme legislation which on the one hand have made the scheme more accessible in terms of the value of shares awarded but on the other hand have reduced the capital gains tax advantages previously afforded.  

The recent changes include; 

The limit on the value of shares that can be held by employees under EMI share options has been increased from £100,000 to £120,000.  

The EMI Scheme has been limited to companies with no more than 250 employees.  

The new capital gains tax rules effective from April 2008 abolished indexation relief and taper relief and introduced the new Entrepreneurs Relief (ER) and a new flat rate of CGT of 18%. ER effectively operates in the same way as taper relief in that if ER is available, individuals will be subject to a 10% CGT rate on the gain arising on the disposal of a business asset (subject to maximum lifetime gains of £1m).  

For ER, there is a minimum qualifying holding period of the shares of 1 year. Under the old taper relief rules, the shares had to be held for at least 2 years. However, employees holding EMI share options in an unquoted trading company previously started to accrue taper relief from the date of grant of their options and could therefore accrue full taper relief after 2 years, even if they had not yet exercised their options and acquired the shares.  

With ER, the qualifying period of ownership starts when the employee acquires the shares. Under the new legislation, employees will now need to exercise their EMI options and hold the shares for at least 12 months before a sale.  

In addition, ER is only available where the individual holds at least 5% of the share capital and voting rights.  

Companies with existing EMI options in place should consider whether their employees (who are entitled to at least a 5% shareholding) should be permitted to exercise their options at least 12 months in advance of a potential sale.  

For companies wishing to newly incentivise key employees, the EMI scheme remains an attractive alternative to annual cash bonuses or benefits. In today's competitive market, it is becoming increasingly difficult to attract, retain and incentivise your key employees. A share option scheme offers your company the ability to reward your key staff by offering them a share in the success of the company in a tax efficient manner.  

The key benefits of an EMI Share Option include; 

No tax implications for employers or employees of granting EMI share options.  

On exercise of the EMI options, the employer company will be entitled to a statutory Corporation Tax deduction based on the difference between the market value of the shares at the date of exercise and the price paid by the employees for the shares.  

The employer can choose which employees are to be awarded EMI share options.  

Performance targets can be incorporated into the individual Option Agreements.  

Advance HMRC approval is not required before implementing an EMI Scheme.  

Employees can share in financial success of company at a maximum tax cost of 18% possibly 10% if ER qualifying conditions are met.  

If you have been looking for a tax efficient way of locking in your key employees and enabling them to share in your company's financial success and would like to further discuss the advantages of the EMI Scheme for your company, please contact our Tax Consultant, Kelly Garside. We will be happy to provide you with a no obligation review to see how EMI can be used in your company.  

To find out more, please contact Kelly Garside on 01204 414243 or email kelly.garside@cowgillls.co.uk