Now more than ever, there is a profound need for companies to invest in both attracting and retaining key employees. Moorcrofts corporate partner and CFO Teri Hunter advises that this is critical to the long-term health and success of businesses.
An EMI scheme can be an excellent way to achieve these goals, by rewarding employee’s efforts, and encouraging them to work hard to build value in the business. The long-term nature of the scheme, and potential for financial gain encourages employee retention.
An Enterprise Management Incentive (EMI) scheme is a tax-efficient and HMRC approved scheme which allows employers to grant share options to their employees. Employees are offered the opportunity to purchase shares in the company at a price fixed from the start. This fixed option price will usually be agreed in advance with HMRC, following a share valuation prepared by the company’s accountants.
While there is no limit on the number of employees that are permitted to hold EMI options, companies are subject to a cap of £3 million on the total value of shares in the company that are subject to unexercised EMI options at any time. In addition, each individual EMI option holder has a maximum entitlement of £250,000 worth of shares (as valued at the date of the grant option).
Under EMI legislation, only certain companies and employees will qualify to both offer and participate in an EMI scheme. There are a number of factors to consider, including, but not limited to:
Companies:
Employees:
How options are exercised by employees is detailed in the scheme rules, which can be tailored for each company and its needs and business aspirations. Specific criteria will need to be met before exercise is allowed, for example once a specific target or date has been met, or on an exit, such as the sale or listing of the company. Companies can use these targets to encourage and promote certain behaviors, or drive growth and build value in certain areas of the business.
When options are awarded, employees are not required to pay for the shares. This only happens when the options are exercised, and the price payable will be the agreed price set at the start of the contract. If the company’s share price has increased in value between the time of grant of option and the time of exercise, the uplift is not charged to income tax. Instead, this gain will be subject to the lower capital gains tax (CGT). This may be taxed at entrepreneurs’ relief rates of 10%, provided that the shares (or option) have been held for at least one year, and the employee remains an employee or director at the time of exit. This is advantageous to the employee as it negates the need to hold a 5% shareholding in the company, which would usually be required to qualify for entrepreneurs’ relief.
In some circumstances tax can become chargeable on exercise of the option, especially if the option were not part of a tax advantaged EMI scheme. Therefore, careful drafting is needed and advice should be sought to make sure any scheme created is EMI compliant.
To discuss the content of this article or to discuss whether your company can implement an EMI scheme, contact Teri Hunter:
01628 470004
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