Thankfully the rules applying to the tax treatment of Enterprise Management Incentive (EMI) schemes have recently changed, making them even more tax efficient than before.
Qualification for Entrepreneurs’ Relief
Significantly where shares are acquired under an EMI scheme, it is no longer necessary to own 5% of the shares in a company in order to qualify for Entrepreneurs’ Relief. This means any uplift in value will be taxed at 10% rather than 20% (or 10% for basic rate tax payers) from 6th April 2016.
Attracting, recruiting and retaining employees through an EMI scheme
An EMI scheme is a tax efficient share option scheme that allows companies to grant options to selected employees to buy shares at a fixed price in the future. EMI options can act both as a valuable incentive to attract or recruit new employees and as a means of motivating existing employees.
EMI schemes are incredibly flexible with the ability to select who receives the options, and can include performance conditions that have to be satisfied before the options can be exercised (and so the actual shares purchased).
No Income TAX or NI on EMI schemes
From a tax perspective EMI schemes are very attractive. Provided that the exercise price (the price to be paid for the shares) is not less than the market value of the shares when the option was granted (which can be agreed with HMRC), there will be no Income Tax or National Insurance payable either when the options are granted, or when the shares are actually purchased.
It has always been the case that when the EMI shares are sold, any uplift in value is subject to Capital Gains Tax, which benefits from an Annual Exemption and lower rates of tax relative to Income Tax. This tax is only triggered when the shares are sold, and there should be cash proceeds available to settle the tax. Further, the position has improved significantly since April 2013.
10% instead of 20%
Under the new rules all shares (including nonvoting shares) acquired under the terms of an EMI option will qualify for Entrepreneurs’ Relief. This means that the uplift in value from the exercise price will be taxed at 10% instead of 20% (or 10% for unused basic rate income tax band).
In order to qualify for the relief the combined ownership period of the option and shares has to be at least 12 months, but there is no requirement to own 5% of the shares in the company, as would be the case for shares not acquired through an EMI scheme.
Corporation Tax relief
In addition to the favourable tax position for the employees, the employing company can benefit from Corporation Tax relief on the difference between the market value at the time the option is exercised and the shares are acquired, and the price paid under the option agreement.
These rules also apply to existing schemes. Therefore, if you have an existing EMI scheme that you would like reviewed, or if you are interested in implementing a scheme to reward and motivate your key members of staff.