Enterprise Management Incentives (EMI options)

What are EMI options?

EMI options are for smaller companies. They combine flexibility with high tax efficiency and we recommend you to consider it if you think your company might qualify.

How does EMI options work?

Employees whom you select to participate are granted an option to buy shares in your company, paying a fixed price if they do decide to buy the shares (exercise the option.) Often the price will be the value of the shares when the option is granted. There is no obligation to exercise the option, so if the share price doesn't rise employees would be unlikely to exercise.

EMI options benefit from an extremely advantageous tax treatment on any growth in share value between the dates of grant and exercise.

How might an EMI option scheme benefit your company?

• You can provide your key employees with a financial reward whose value is directly determined by business success and which may be taxed at a significantly lower rate than a cash bonus
• You can encourage commitment from your key people by stating that they may only exercise their EMI share option if they stay with the company
• Shared ownership can be a powerful tool in encouraging your employees to understand the connection between how they and their team members work and how well the company performs

What are the tax benefits of EMI options?

Assuming the EMI option exercise price isn't less than the market value of the shares at the time of option grant:

• There is no income tax or National Insurance on any financial benefit received by the employee
• When shares acquired through exercise of EMI options are eventually sold, capital gains tax (CGT) will be due on option gains (the difference between exercise price and sale price). CGT is currently payable at 18% (or 10% if entrepreneurs' relief applies ' see below).

Your company should also be able to claim a deduction against corporation tax for the full amount of financial gain provided to employees who exercise their EMI options.

Are there any disadvantages to EMI options?

• You may feel cautious about allowing others to acquire ownership rights in your company. Where necessary this might be addressed by, for example, granting EMI options over non-voting shares or allowing exercise of EMI options only on a sale of your company
• Depending on the size of your company, the value of options granted may be treated as an expense against profits, so there may not be an accounting advantage for options compared with cash bonuses.
• You will need to spend some time when setting up your EMI scheme in designing it in a way which meets your own company's needs and you will need to take time to communicate it clearly to participants
• There are some annual ongoing administrative requirements
• A 10% CGT rate will only be available if the conditions for entrepreneurs' relief are satisfied (broadly, at least a 5% voting shareholding is disposed of, which has been held for at least one year by a director or employee). Where tax efficiency is a high priority and an individual is to be granted rights over at least a 5% shareholding, you should also consider direct share ownership as an alternative to EMI options as this may result in a lower rate of CGT on eventual share sale

Does your company qualify to grant EMI options?

• EMI options are for smaller companies only with gross assets of no more than £30 million
• Companies running certain businesses or with 250 or more employees are excluded from granting EMI options
• Your company must be independent - it must not be a subsidiary of or controlled by another company
• Your company must operate wholly or mainly in the UK
• Shares used must be ordinary shares but they need not have all the rights of ordinary shares; so, for example, they may have no voting rights attached

Do your employees qualify to be granted EMI options?

• Any employee who is to participate must work for the company for at least 25 hours a week, or if less, for at least 75% of their working time
• Anyone holding 30% or more of your companys′ ordinary shares won't be eligible

Are there any limits under an EMI option scheme?

• EMI options may not be granted over shares with a market value in total (measured at the time each option is granted) of more than £3 million
• For each employee, there is a limit of £120,000 (for grants made after 5 April 2008)

Could anything affect the tax treatment of EMI options?

If certain things happen between option grant and exercise so that the options cease to qualify under EMI, income tax can become payable on gains up to the date of exercise.

The main disqualifying events are:

• the company becoming controlled by another company
• the company's trade ceasing to qualify
• the optionholder ceasing to work for the company or sufficient hours a week
• an individual being granted EMI options over shares with a value of more than £120,000.

How many companies have EMI share option schemes?

According to HM Revenue & Customs, over 9,000 UK companies have EMI option schemes.

How do you set up an EMI option scheme?

The key tasks are likely to be:

• Confirming whether your company and employees qualify for EMI options
• Deciding how your EMI option scheme is to work, for example when options may be exercised
• Preparing an option agreement and related documents
• Agreeing current share value with HM Revenue and Customs
• Explaining to participants how the options work
• Reviewing your company's articles of association to ensure they are compatible with employee share participation
• Arranging for director's and sometimes shareholder approval
• Notifying the Revenue of option grants

How long does it take?

You should normally allow two months, but it can be done more quickly if time requires.

How much does it cost to receive professional advice to create an EMI option scheme?

The cost will depend on how much help you are looking for. We would provide you with a cost after a free initial meeting. It is normally possible to give a fixed cost. We would not advise you to provide share incentives through EMI options unless the projected tax savings were significantly in excess of the professional costs.