In order to retain and incentivise key employees more and more companies are looking carefully at share options. This applies to companies of all size from new start-ups compensating for a lack of cash or investment, to established companies seeking to reward staff in anticipation of a disposal of the company.
There are various ways of sharing the equity in the company. Time needs to be spent identifying the company’s objectives and to then consider which scheme best meets those objectives. Tax efficiency is always paramount, but this still needs to be tempered against the company’s other commercial objectives. However, often the share option scheme of choice is an EMI scheme.
EMI offers something that no other share option scheme currently does:-
significant tax advantages
flexibility of structure and terms
cost-effectiveness of set up and ongoing administration
This article seeks to provide a summary of the key aspects and qualification requirements for EMI.
EMI enables employers to give their employees the option of acquiring shares in the future at an exercise price set at the date of grant. Like any other tax approved scheme, there are qualification requirements that must be met. However, EMI schemes are generally accepted as being one of the most flexible schemes available. For instance, the exercise price can be less than market value (although this will affect the tax treatment), the options can be offered to selected employees and to each such employee on different terms, and there are very few limits on the types of exercise or performance conditions that can be attached. Consequently, when structured correctly, EMI can help attract and retain employees, can assist employees to identify more closely with the future objectives of the employing group and can be an effective way of focusing management’s efforts.
In light of the commercial and tax benefits, most companies considering a share scheme will go for EMI. However, not all companies qualify. Below is a summary of the key EMI requirements and limits:
The company must be independent of other companies and not under the control of another company (whether on its own or together with other persons), i.e. the shares must be in the parent company even if that is a non-UK company
The company may only have qualifying subsidiaries, i.e. it must own more than 50% of the share capital of each subsidiary it controls (or 90% of subsidiaries with a business which wholly or mainly holds or manages land)
The company/group’s gross assets must not exceed £30 million
The company must be a trading company, or the parent company of a trading group, with a qualifying trade. Excluded trades include, for example, banking or other financial activities and property development
The company/group must have a UK permanent establishment, such as a place of management, a branch, an office, a factory or a workshop
The company/group must have fewer than the equivalent of 250 full-time employees
Participating employees (including executive directors) must be subject to UK tax and must work at least 25 hours per week or, if less, 75% of their working time for the company/group. Non-executive directors are not eligible to participate
Participating employees (including executive directors) must not have a “material interest” in the company either alone or together with their associates. For this purpose, a “material interest” means beneficial ownership or control of more than 30% of the shares or entitlement to more than 30% of the assets on a winding up or other distribution
An employee can only be granted EMI options over shares with an unrestricted market value at the time of grant that does not exceed £250,000. The company is also subject to a £3 million overall limit on the unexercised EMI options it may have in place, again based on the unrestricted market value at the time of grant
The shares must be non-redeemable, fully paid-up ordinary shares but otherwise can be subject to special rights and restrictions
In addition, the EMI options must take the form of a written agreement between the grantor and the employee, be capable of being exercised within 10 years from the grant date and prohibit the transfer of the employee’s rights under them
On 6 April 2013 two major restrictions on the availability of ER were removed specifically for EMI, meaning the typical EMI option holders described above would now qualify for ER and the 10% CGT rate:
the 5% requirement has been removed so an individual holding less than 5% of the shares or 5% of the voting rights can now qualify
the 12-month clock will start ticking from the date the option is granted and not the date the option is exercised, so provided the individual holds the option for at least 12 months even shares held for a moment before a sale can now qualify
Georgina is granted an EMI option to acquire a 5% shareholding in her employer company for its market value of £10,000. Four years later she exercises the option when the shares are worth £100,000, and eventually sells them for £150,000 when the company is taken over. Georgina pays no tax when the option is granted, and nor does she pay any tax when the option is exercised. On sale of the shares, Georgina pays capital gains tax on the gain of £140,000 (£150,000 sale proceeds less £10,000 option exercise price). Ignoring any reliefs she may have available, tax is charged at a rate of 10%, tax of £14,000.
If you would like to explore the numerous benefits of EMI further and have a no obligation chat, please do not hesitate to contact our Managing Director, Eliot Hibbert firstname.lastname@example.org 0330 024 2420.