Overview
EMI share option schemes are a very tax efficient way to reward and incentivise key employees. They work by allowing an employee to acquire shares in the company at some point in the future, but at a price which is set at the date the option is granted. The employee therefore benefits from any growth in value of the shares.
Is my company eligible to issue EMI share options
In order to grant EMI share options to its employees, the company must meet certain conditions. These include:
- Independence – the company cannot be controlled by another company;
- Size – the company must have less than £30 million gross assets, and fewer than 250 employees at the date the options are granted;
- Group structure – All subsidiaries must be under the control of the issuing company; and
- Qualifying activity – Companies do not undertake certain precluded activities.
A full review would be necessary to confirm a company’s eligibility to offer EMI share options.
Can my employee receive EMI options
In order to be eligible to receive EMI options, the employee must also meet certain requirements. These include:
- Working time - Work at least 25 hours, or if less, 75% of their working week for the company (as an employee);
- Material interest – the employee cannot hold a material interest in the company
- The total value of options that can be offered to a single employee at the date of grant is £250,000.
Tax benefits
The exercise price of the option can be set by the employing company. As long as the exercise price is set at a value which equal to, or greater than, the market value of the shares at the date of grant, then there will be no tax consequences for the employee at the date of grant or when the options are exercised.
When the shares are sold, the difference between the sale price, and the amount paid for the shares (the exercise price) which will be subject to capital gains tax at a rate of either 10% or 20% (if a higher rate tax payer).
The company may benefit from a corporation tax deduction when the employee exercises their share option.
Other benefits
EMI share options are very tax efficient, however they also offer a number of commercial advantages which are equally important, such as:
- Employees are granted an option to acquire shares, rather than being issued actual shares. This means that there is no up front cost to the employee for acquiring the shares, and the founder shareholders are not introducing a minority shareholder into the company and
- The option documentation can include targets which must be met prior to the option being exercised, thereby incentivising the employee in a targeted manner.
How can we help?
- The Armstrong Watson tax consultancy team can help:
- Review eligibility for the company to offer EMI share options;
- Design an EMI share option scheme suitable for your business needs and objectives;
- Prepare and agree the valuation of the option shares;
- Communicate the benefit of the scheme to the option holders;
- Arrange completion of the option paperwork; and
- Completing and submitting the required filings to HMRC.
