Ten need to know points about EMI share options

As the economy gets stronger Enterprise Management Incentive (“EMI”) share options are becoming increasingly popular. Here are ten things you need to know if you are considering implementing one of these tax advantaged share option schemes:

  1. EMI share options are a way to recruit, reward, retain and incentivise employees by giving them options to purchase equity in the company at a later date.
  2. The option price is fixed at the date of the option, so as the company grows in value the option price stays the same. This means that an employee can purchase shares in the company at a much lower price than the shares market value.
  3. Provided that the option price and exercise price are at market value the grant of the option should be tax free and there will normally be no tax or National Insurance consequences when the employee exercises the option. There will normally be no National Insurance charge for the employer either.
  4. HMRC have introduced legislation to ensure that EMI share options qualify for capital gains tax entrepreneurs relief at 10% rather than the higher 18%/28% rates. This is regardless of an employee holding the shares for less than a year (as long as they have had the option for over a year). Also an employee doesn’t have to have the usual 5% of the company to qualify for entrepreneur’s relief.
  5. A fact that is often overlooked is that the company gets corporation tax relief on the difference between the option price and the exercise price when the shares are acquired.
  6. The company can not be controlled by another company; also some trades do not qualify for the tax relief.
  7. You can decide the terms on which the share options are exercised and there is huge flexibility in terms of this. Common reasons to exercise the option are hitting performance targets, sale of the company, rewarding long service or even just the discretion of the directors.
  8. For a company to qualify for the share option scheme it must have gross assets of less than £30m and 250 full time employees or less. A total of £3m shares can be held under option, of which and employee can hold £250,000.
  9. For an employee to qualify they must work 25 hours a week for the company (or 75% of their working time) and they can not own 30% or more of the company.
  10. Once the employee becomes a shareholder, there are still lots of scenarios to consider, in respect of their shares. The shares can simply continue to be held by the employee to receive a dividend and incentivise the employee by ensuring they continue to drive the business forward and grow their capital. Other scenarios are that often share options are put in place for a future sale of the business or floating the company. Often they might be used as a stepping stone for a future management buy out.

There are further criteria, so specialist advice must always be sought when implementing EMI options.

Steven Holmes, Tax Consultant

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