EMI Schemes: How do share options work?
We have previously explained what EMI schemes are and why they could benefit your business which you can read about here: EMI Schemes: What you need to know.
Here we give a bit more information about how share options actually work.
Here is a brief recap of what an EMI scheme is …
Put simply, an EMI scheme is an employee share scheme which is government approved, tax beneficial and a flexible way of incentivising staff. It enables employers to reward employees for their efforts and can incentivise and retain staff.
What is a share option?
A share option agreement is a legal contract which grants the right to buy a company’s shares in the future, at a price that is fixed today. If the value of the company increases over time, option holders might make a significant profit when they sell their shares. Conversely if the shares fail to increase in value, there is no obligation to buy the shares. This makes the option basically risk free.
Here is an example of how an EMI scheme can benefit the employee
Imagine you are an employee and let’s say that you’re given an option to buy 1000 shares at £5 each, at any time in the next ten years, provided you are still an employee when you want to buy them.
After seven years, the company is sold at £50 per share. The employee can exercise their option and the buying company buys the shares. So, the cost to the employee is £5,000 but they sell them to the buyer for £50,000, making a gain of £45,000.
Why are share options popular?
Share options are popular with growing companies who can offer them to attract talented staff. The opportunity to buy shares, to be a stakeholder and benefit in the company’s growth alongside the owners, provides a powerful motivation when offered in addition to the usual salary package.
Employees are more likely to feel aligned with the interests of shareholders and the board if they have a tangible interest in the company’s ownership – at some point they will see rewards for the effort that have put in.
Not really, although the impact of tax on an employee’s share gains is an important aspect that needs to be considered. Without an EMI scheme, any employee who makes a profit on their company’s shares could pay income tax and possibly national insurance on the profit. With an EMI, there is a 10% CGT charge.
Considering an EMI scheme?
There are no upfront tax costs and they are low risk – if the employee leaves before the EMI option is exercised then the option lapses and leaves the employee with no further rights under the scheme.
The information was correct at time of publishing but may now be out of date.