The use of the Enterprise Management Incentive ‘EMI’ scheme can help small growing companies acquire and retain employees. The scheme is available to most trading companies and, as well as allowing employers to grant share options to key employee’s tax efficiently, can be used as a reward for their efforts within the business and to incentivise key staff.
Under an EMI scheme, the employee has the right to receive shares in the company they work for at a later date. As the employee is receiving shares in the company they work for, unless they pay the unrestricted market value for those shares (this is a valuation for tax purposes only), then an income tax charge arises, and potentially national insurance contributions will also be due. An EMI is an approved HM Revenue & Customs share option scheme which allows employers to award shares to employees at an approved valuation free of income tax and national insurance.
EMIs are very flexible, and each EMI option agreement can be tailored to each individual employee so, for example, specific targets can be set for each employee, or the exercise can be restricted to an actual sale of the company.
Until the EMI options are exercised, the employee is not a shareholder in the company. In most cases EMI options cannot be exercised until the company is being sold, the employee would not therefore qualify for Business Asset Disposal Relief (the 10% rate of capital gains tax on qualifying shares) because the shares will not have been owned for 2 years. However, this potential drawback is specifically provided for in the legislation by extending the two-year ownership period so it includes the period between the date the option is granted and the date it is exercised. Therefore, providing the EMI option is granted at least two years before the shares are sold, any gain on the shares will qualify for the 10% rate of capital gains tax. If the two year holding period is not met, this will result in the employee paying 20% capital gains tax, i.e. double the tax originally anticipated.
As this is an approved HM Revenue & Customs’ scheme there are several conditions that both the company and the individual need to meet to qualify, with the ability to request HMRC advanced Assurance if there are any elements of uncertainty. More details on the scheme generally can be found HERE.
If you would like any further advice on the use of EMIs and incentivising your staff, please contact Aaron Phillips.
Written January 2019 (updated June 2023)