How to benefit from an EMI share scheme

How to benefit from an EMI share scheme

In our latest blog, we explore EMI share schemes and explain how early-stage and growing businesses can benefit from this type of tax-advantaged employee share scheme.

Estimated reading time 2:30 minutes

Attracting, recruiting, motivating, and retaining employees through an EMI share scheme

An EMI share scheme is the most tax-efficient and flexible HMRC-approved share option scheme. It 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 talent and as a means of motivating and retaining existing employees.

EMI share schemes are highly flexible, allowing key decision-makers to select recipients of the options. The scheme can also include performance conditions that have to be satisfied before the options vest and can be exercised (and so the actual shares purchased), for example:

  • As a benefit within your recruitment package to attract a new employee
  • As an incentive to motivate a pivotal employee to drive up the value of the company
  • To reward a long-term highly valued employee without altering the pay structure
  • As a ‘golden handcuff’ to retain a specific employee until an exit

It’s important to note that the EMI options must be registered online with HMRC within 92 days of the date of grant or the tax benefit to the company and employee may be compromised.

Additionally, companies must submit annual returns to HMRC, in respect of each registered employment-related securities scheme or arrangement (this includes EMI schemes) by 6 July following the end of the relevant tax year.

Unfortunately, not all companies can participate

  • The company must be independent
  • Gross assets must be less than £30m
  • It must be a qualifying trade (not financial activities or property development, for example)
  • The company needs a UK permanent establishment
  • There must be fewer than 250 employees
  • The EMI options can total a maximum of £3m – based on the market value at the date of grant

There are also restrictions for the option holders

  • The market value of the options can be no higher than £250,000 (based on the market value at the date of grant)
  • The employees must be full time – or at minimum, work 25 hours a week or 75% of the working time (whichever is lower)
  • When an employee leaves the company, the EMI options will lose EMI tax status if not exercised within 90 days of leaving

No Income Tax or NI on EMI share schemes

From a tax perspective, EMI schemes are very attractive. Provided that the exercise price (the price to be paid for the shares) was not less than the market value of the shares when the option was granted, payment of Income Tax and National Insurance is not required when the options are granted, or when the shares are purchased.

The market value of the share must be agreed with HMRC beforehand

Capital Gains Tax

When the EMI shares are sold, any uplift in value is subject to Capital Gains Tax, which does, however, benefit 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.

Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief, before 6 April 2020)

Under the EMI scheme rules, all shares acquired under the terms of an EMI option will qualify for Business Asset Disposal Relief. This means that the uplift in value from the exercise price will be taxed at 10% instead of 20% (or 10% for the unused basic rate income tax band).

To qualify for the relief, the combined ownership period of the option and shares has to be at least 24 months. There is no requirement to own at least 5% of the shares in the company, as would be the case for shares not acquired through an EMI scheme.

Corporation Tax relief

The employer can benefit from Corporation Tax relief on the difference between the market value at the time the option is exercised, and when the shares are acquired, and the price paid under the option agreement.

Setting up an EMI Share Scheme

It’s a good idea to review your share structure before implementing an EMI scheme. The granting of share options within an EMI scheme has the effect of diluting current shareholdings so it is vital to determine the distribution of share capital and the rights attached to the shares before setting up an EMI scheme.

If you would like some help implementing an EMI Share scheme, please get in touch

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