EMI share option schemes are a mechanism by which key employees can be offered a potential equity stake in a company or group of companies, in a tax advantaged manner.
EMI options can be an alternative to salary and bonus structures, to reward or incentivise one or more selected employees.
EMI schemes are aimed at trading companies with growth potential, which meet the qualifying conditions.
What is a share option?
A share option grants an employee the right to acquire a specified number of shares in a qualifying company, for a specified price, under the terms set out in an option agreement. The option agreement will outline when the shares can be acquired through the exercise of the option and may have certain conditions which are for example, time or performance based.
What is a qualifying company?
To be eligible for an EMI scheme a company or group of companies must:
- Have fewer than 250 employees,
- Have gross assets of £30 million or less,
- Be trading or the parent of a trading group (but cannot itself be a subsidiary company)
- Have a permanent establishment in the UK,
- Carry out a qualifying trade, and
- Not conduct excluded activities including accounting, financial, legal and business services, property management and development, farming, hotels and care homes.
How makes a qualifying employee?
To be eligible for EMI options an employee must:
- Work at least 25 hours per week, or spend 75% of their total working time for the company, and
- Not have a material interest in the company (30% or more of the share capital).
The maximum value of shares for which an individual may hold under EMI is £250,000, calculated at the date of grant of the options. The maximum value of potential shares that can be held under EMI options, is £3 million.
EMI scheme options can provide benefits for both employers and employees
Benefits of an EMI Scheme for employers
- It helps employers to attract and retain employees. It can also improve employee engagement.
- Employers can obtain corporation tax relief on the difference between the market value of shares at the date of exercise of the options and the exercise price paid. This can be factored into the value of a company on a future sale.
- Ordinarily, there is no employer’s National Insurance Contributions (‘NICs’) payable by the company.
Benefits of an EMI Scheme for employees
- Employees are only exposed to income tax when the options are exercised, not at the point the options are granted. Unless the share options are granted at a discount, there will be no income tax on exercise.
- Because it is possible to agree with HMRC the value of the shares when the options are granted, there is certainty on any potential tax liability.
- On a subsequent disposal of the shares, Capital Gains Tax (‘CGT’) can potentially be applied at a lower rate of 10% instead of 20% on the growth in the value of the shares so long as the options are held for a period of 24 months from the date of grant and the company meets the conditions for Business Asset Disposal Relief.
If you want to explore how EMI options can benefit your business and your employees, get in touch with your Cowgills contact or visit our website.
