EMI Share Option Schemes
What is an EMI Share Option Scheme?
Launched in 2000, the Enterprise Management Incentive (EMI) Share Option Scheme is designed for UK-based employees and is very popular, due to the enormous benefits it confers on qualifying UK companies (those that do not deal in land, financial trading, leasing or property development) and their employees.
Employees will qualify for the scheme if they spend at least 25 hours per week (or if less, 75% of their working time) on the business of the company or group of companies.
At full discretion of the company, certain employees are permitted to acquire rights to the acquisition of its shares at a fixed pre-agreed price (known as the ‘exercise’ or ‘strike’ price) at a date in the future. This price will normally be the market value of the shares at the time the option is granted.
For example, an employee could be granted an option to buy 100 shares at a nominal price of £1.00 per share. Ultimately, EMI Share Option Schemes are the most tax efficient way to provide equity to your employees, and UK-based consultants and contractors.
There are strict rules in place relating to the company, namely that it must:
1. Not have gross assets of more than £30 million;
2. Cannot be a company with certain sectors (as described above);
3. Be independent – it must not be a subsidiary or be controlled by another company;
4. Be established permanently in the UK;
5. Not have 250 or more employees; and
6. Use ordinary shares – although such shares do not need to have full rights attached to them (e.g., they may have no voting rights).
Benefits for the employer and employees
EMI Schemes are advantageous to retain key employees and reward them for investing their skills and time in the company’s growth, without the employees being lumbered with a significant tax charge which would happen if the EMI Scheme is not in place and the shares are gifted or acquired at less than their full value at the time of acquisition.
The employer benefits because employees are highly incentivised to work hard and efficiently because they reap the rewards of this work at a time in the future. Everyone benefits from the future ‘exit event’ when the shares are exercised.
Setting up an EMI Scheme comes with enormous tax benefits for both the company and employee(s):
It most likely will be able to claim a deduction against corporation tax for the full amount of an employee’s option gains.
As long as the option exercise price is not less than the market value of the shares at the time of the granting of options:
There is no income tax or national insurance payable on any financial benefit received by the employee; and Capital gains tax (CGT) will be due on option gains when the shares acquired through exercise of EMI options are eventually sold. CGT is normally payable at 20% generally for a higher-rate tax payer, but with an EMI scheme in place CGT is charged at a reduced rate of 10%.
How we can help
If you would like to give shares in your business to your UK-based employees or contractors and would like to set up an EMI Share Options Scheme, we would be happy to help and discuss a suitable fee mechanism to suit your needs.