Employee share ownership is an effective way of both rewarding employees and engaging them in a company’s performance. The right share scheme for your business can improve employee commitment and motivation, which in turn can enhance company performance and growth. Further, by using a tax advantaged scheme such as an Enterprise Management Incentive (EMI) you can incentivise employees tax efficiently.
EMI is a popular tax advantaged scheme for small and medium-sized employers, as it provides excellent tax efficiencies for both employees and the employer and is relatively straightforward to implement.
What is EMI?
EMI is a highly tax efficient share option scheme most suited to smaller businesses. They tend to be most effective where employees can see a medium-term opportunity to receive value from their option, eg on an exit event such as a trade sale or flotation. In general terms, companies that qualify can grant qualifying employees options up to a value of £250,000 per employee, within certain specified limits. The employer can determine which employees participate in the scheme.
Typically, employees will be granted an option to buy shares at a certain point in the future, which may be dependent upon company and/or employee performance criteria, at a fixed price (this is usually the market value of the shares at the date the option is granted but this can vary).
- The employee benefits from advantageous income tax treatment. If the exercise price of the options is no less than their market value at the date of grant, there are no income tax or National Insurance charges on grant or exercise. There is no employer National Insurance charge either.
- Any growth in value will generally be subject to capital gains tax (CGT) on ultimate disposal of the shares. Employees can usually claim Entrepreneurs’ Relief and access the lower 10% rate of CGT. The date of grant will count as the date of acquisition for Entrepreneurs’ Relief and the 5% minimum shareholding rule does not apply where shares are obtained from exercise of an EMI option.
- The employing company should be able to claim a deduction against corporation tax for the full amount of the financial gain provided to employees who exercise their options.
- The employer can identify the key employees that it wishes to benefit and can incorporate performance conditions into the scheme that employees have to meet and which are aligned to the company’s objectives.
- EMI encourages long-term commitment from participating employees.
- Generally, an EMI scheme is relatively straightforward and cost-effective to implement.
- There are strict qualifying criteria for the employee and the company to meet. For example:
- Certain business activities are specifically excluded, including but not limited to most financial and banking activities, legal and accountancy services, property development, and farming;
- The company must be independent and not a 50% subsidiary or otherwise under the control of another entity;
- The company must hold more than 50% of the share capital of any of its subsidiaries;
- The company (or group) must have fewer than 250 fulltime equivalent employees;
- The company (or group) must have gross assets not exceeding £30 million and must not have more than £3 million worth of shares under option;The company must have a permanent establishment in the UK;
- Employees and directors must meet the ‘working time commitment’ in order to be eligible, essentially working the following for the company (or its subsidiary) whose shares are under option:
- at least 25 hours each week (the 25 hours requirement), or
- if less, 75% of their working time (the 75% requirement).
- Employees owning more than 30% of the company (directly or indirectly) cannot participate.
Other Planning Issues
EMI option plans are much more flexible than other tax approved share schemes, so can implement planning ideas such as:
- Growth or freezer shares can be used where share price is high, or there are already large numbers of options in place, such that the £3 million/£250,000 limits become an issue.
- Existing shareholders may wish to protect their shareholdings by, for example, by granting options over non-voting shares, or by allowing for exercise only on an exit event.
- Individual performance or vesting conditions can be attached to the option agreements in order to better incentivise staff.
- There is no requirement for the exercise price to be set at the market value at grant, so the option price can be set at very low or even NIL values.
Most suitable for
- Small and medium-sized businesses that want to reward and retain key employees (who meet the qualifying criteria).
- Where there is a medium-term exit event or other mechanism to allow employees to realise gains in the medium-term.
This factsheet is based on law and HMRC practice at 1 October 2019.