EMI Share Options
EMI share options (Enterprise Management Incentives)…
Are you a trading company with growth potential looking to retain and recruit?
Our team of London tax advisers regularly help and advise clients on EMI share options.
EMI share options are specifically designed for trading companies with growth potential and
are intended to help such companies recruit and retain employees. They provide individuals
with significant tax benefits and are much more flexible than other tax favoured share plans.
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Everything you need to know about EMI…
What are the main features of EMI?
EMI can be used for quoted or unquoted companies which have gross assets of £30 or less and are independent.
A company must have fewer than 250 employees.
All employees who work more than 25 hours per week can be granted EMI options.
Each participant can be granted options over shares worth, at the date of grant, up to £250,000.
The limit on the total value of options that can be granted under EMI is £3 million.
There will be income tax and National Insurance Contributions (NIC) reliefs on grant and exercise of the options.
Capital Gains Tax (CGT) at 20% will usually be payable on sale of the shares
If the shares are held for at least 24 months from the date they were granted, the gain is likely to qualify for Business Asset Disposal Relief and be subject to CGT at only 10%.
A company can obtain “advance assurance” that it qualifies for EMI.
Provided conditions are met, a corporation tax deduction should be available to the employing company on the date the employee exercises the shares.
How does a company qualify for EMI?
EMI is available to quoted or unquoted companies which have gross assets of £30 or less and are independent. In a group the gross assets test is applied.
The company must carry on a qualifying trade and there are detailed provisions in this regard.
A company granting EMI options must not be under the control of another company. However, the parent company or a qualifying group can grant EMI options to group employees.
What employees are eligible for EMI?
EMI options can only be granted to employees who are required to work for the company (or group) for at least 25 hours a week, or, if less, at least 75 per cent of their working time.
Employees who have a ‘material interest’ of more than 30 per cent of the share capital before the options are granted are excluded
What are the tax benefits of an EMI scheme?
The tax benefits available for both the employer and employee are very generous.
Providing the price payable for the shares is the fair value when the options are granted there is no income tax or NIC due by the
employee at the date of grant or on exercise.
Note that the fair value of the shares can usually be significantly discounted for a minority holding if that company is not listed
on a recognised stock exchange.
On an eventual sale of the shares the capital gain would usually be subject to capital gains tax at either 10% or 20%. However providing there is at least 12 months between the date of grant and the disposal of the shares the individual should be able to claim Business Asset Disposal Relief and pay a reduced rate of capital gains tax at 10%.
The company benefits from a corporate tax deduction on the difference between the value used at grant and the value of the
shares at exercise. This deduction is allowable for the company on the date of exercise of the shares.
What are the potential pitfalls of an EMI scheme?
EMI provides generous tax and NIC reliefs for qualifying options. However, there are a number of disqualifying events which will
trigger a time limit for action to protect these tax benefits. Disqualifying events include:
• The company coming under the control of another company.
• The company ceasing to meet the trading activities test.
• The employee ceasing to be an eligible employee.
• A variation in the terms of the option.
• A non-commercial alteration to the share capital of the company that increases the value of shares under option.
If there is a disqualifying event the option will have to be exercised within 90 days of that event to ensure full income tax and NIC
benefits are maintained. It is essential that companies and option holders keep EMI arrangements under review.
On a sale or takeover it is possible to have an exchange of options which will protect the tax reliefs. This should be provided for in EMI option agreements.
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