Enterprise Management Incentive (EMI) scheme
The government has introduced EMI schemes so that employees can have shares in their employer’s company without suffering a large tax bill.
If you simply gave shares to an employee outright, the market value of those shares would be taxed as earnings. This creates a tax liability for the employee, who might not have the means to pay it.
EMI schemes enable you to grant share options without any tax liability arising until the shares are ultimately sold.
employee tax benefits
- Granting the option is tax-free.
- There’s no tax or NIC to pay when the option is exercised, as long as the amount paid for the shares is the market value when the option was granted.
- The employer can choose to grant options at a discount. When the option is exercised, there will be an income tax charge based on the difference between the amount paid and the value when granted.
- Once the option has been exercised, the employee can either retain or dispose of the shares. On disposal there will only be a chargeable gain on any further increase in value.
employer tax benefits
- There’s no direct cost to the company, compared to paying salaries and bonuses.
- When the options are exercised, the company gets a tax deduction against its profit, being the difference between the exercise price and the market value on granting the option.
what are the conditions?
EMI schemes are aimed at small, higher risk companies, so there’s various conditions relating to the company, the employee and the options granted:
- your company:
- must not be under the control of another company (if there is a group, the employee must be given an option over holding company shares)
- cannot have gross assets over £30 million
- must carry on a ‘qualifying trade’.
The main trades excluded are:
- property development
- must have less than 250 employees.
- your employee:
- must spend 25 hours or more per week or 75% of their working time (whichever is lowest) working for the company
- controls 30% or less of the company’s share capital.
You can decide which employees are offered options, and these options can lapse if they leave your employment.
- the options granted:
- must be for commercial reasons to recruit or retain an employee, and not for tax avoidance
- limit each employee’s entitlement to a market value of £250,000, any excess is non-qualifying
- limit the total market value of the company’s un-exercised options to £3 million
- relate to fully paid non-redeemable ordinary shares
- are written in a formal agreement with the employee setting out the scheme’s conditions
- are capable of being exercised within ten years of being granted.
how can Mitten Clarke help you?
First of all, we’ll help you decide if an EMI scheme is appropriate for you, and whether your company qualifies. Then we’ll:
- prepare illustrations for you, quantifying the tax benefits for the company and the employees
- perform a share valuation and agree it with HMRC
- have the option agreement drafted by a lawyer
- notify HMRC once the options are granted
- set up the necessary documentation to operate the scheme.
If you need help and advice, our expert advisers are happy meet you at your office or sit down with you at our Staffordshire head office.