Enterprise Management Incentives (EMI) option schemes offer generous tax advantages for both employers and employees. These tax advantages make EMI one of the most tax-efficient ways to reward and incentivise key staff through share ownership.
Key Tax Benefits for Employees
Employees enjoy several major tax advantages with EMI options. When you receive EMI options, there’s no income tax or National Insurance to pay at the grant date. This is a substantial benefit compared to non-tax advantaged schemes.
It is crucial for option holders to comply with the necessary conditions to maintain these tax advantages and prevent disqualifying events that could jeopardise the tax-favored status of the EMI options.
When you exercise your options (buying the shares), you won’t pay income tax if the exercise price was at market value or higher when the options were granted. This saves you from potentially large tax bills at exercise.
The amount an employee pays for shares can significantly impact the tax relief benefits, as the difference in share value when options are exercised can lead to substantial savings.
If you sell your shares later, you’ll only pay Capital Gains Tax (CGT) on the increase in value since the option was granted. Even better, you may qualify for Business Asset Disposal Relief, reducing the CGT rate to just 14% instead of the standard higher rate of 24%.
The EMI scheme offers a holding period of just 24 months to qualify for this relief, making it very accessible to employees.
How Employers Benefit from EMI
Companies granting EMI options can claim corporation tax relief on the difference between what employees pay for shares and their market value. This creates a valuable corporation tax deduction when options are exercised.
Setting up an EMI scheme is relatively straightforward and cost-effective compared to other share schemes. Your company doesn’t pay National Insurance contributions on the options, saving approximately 15% on the value of the benefit.
EMI schemes help you attract and retain talented staff without large cash outlays. The tax efficiency means you can offer more valuable incentives at lower cost to the business.
To qualify, your company must meet certain criteria including having gross assets under £30 million and fewer than 250 employees. The business must also be in a qualifying trade and not be controlled by another company.
Income Tax and Capital Gains Tax Treatment
EMI share options are considered the most tax efficient option compared to other share schemes, particularly due to the favourable EMI tax treatment. The tax treatment is favourable at multiple stages – when options are granted, exercised, and when shares are eventually sold.
Income Tax Relief on EMI Options
You won’t pay Income Tax or National Insurance Contributions (NICs) when EMI options are granted to you. This is a key benefit that makes EMI schemes attractive for employees.
The EMI tax benefits are contingent upon meeting specific qualifying conditions. If a company does not meet these criteria, it may need to explore alternative options such as unapproved schemes.
It is crucial to align the notification of granted EMI options with the end of the tax year for compliance and to maintain tax-favored treatment.
When you exercise your options (buy the shares), you’ll also avoid Income Tax and NICs if you pay at least the market value of the shares as determined when the options were granted. This means no PAYE is triggered at this point.
If you exercise at a discount (paying less than the market value at grant), Income Tax will only apply to the difference between what you pay and the original market value. This creates substantial tax savings compared to non-qualifying share options.
HMRC must approve the market value used for EMI schemes, providing certainty about your tax position from the start.
Business Asset Disposal Relief
When you sell shares acquired through EMI options, Capital Gains Tax (CGT) applies to any increase in value. However, EMI shares typically qualify for Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief.
The actual market value of the shares at the time of grant impacts the gains, particularly when these shares are sold after a specified holding period, influencing the tax relief eligibility.
Additionally, companies benefit from tax relief when employees acquire qualifying shares upon exercising their EMI options, which promotes an ownership culture and provides financial advantages.
With BADR, you pay just 14% CGT on gains rather than the standard 24% rate. This represents a 42% tax saving on your chargeable gain.
To qualify for BADR, you must:
- Hold the option for at least 24 months before selling the shares
- Be an employee or director of the company during this period
There’s a lifetime limit of £1 million for BADR-qualifying gains. Any gains beyond this are taxed at the standard CGT rate.
This preferential CGT treatment makes EMI schemes particularly valuable for employees in growing companies where share values might increase significantly.
Qualifying Criteria and Scheme Structure
Qualifying companies can benefit from Enterprise Management Incentive (EMI) schemes, which offer tax advantages to UK companies and their employees, but only when specific qualifying criteria are met. Both the company and the employees must satisfy certain conditions for the scheme to receive HMRC approval.
It is crucial to establish clear scheme rules and agreements with employees regarding share options, including details such as vesting schedules and the implications of various circumstances on the exercise of the options.
Qualifying Company Requirements
Your company or group must meet several conditions to offer EMI options. It must be independent and not under the control of another company. Your business must also be engaged in qualifying trades – most commercial activities qualify, but certain sectors like property development, banking and farming are excluded.
Additionally, companies cannot engage in substantial non-trading activities such as property investment, banking, insurance, professional services, leasing, or operating hotels and care homes. These are considered excluded activities that disqualify a company from the EMI scheme.
Your company must have a permanent establishment in the UK for tax purposes. The EMI scheme must serve genuine commercial objectives related to recruiting and retaining employees, not simply avoiding tax.
You can request advance assurance from HMRC to confirm your company’s eligibility before implementing an EMI scheme. This provides certainty that your plan meets the qualifying criteria.
Limits on Share Options and Gross Assets
Your company’s gross assets must not exceed £30 million when you grant the EMI options. This effectively limits the scheme to smaller businesses.
The shares offered must be fully paid-up ordinary shares with voting rights. There’s a company-wide limit on the total value of unexercised EMI options, which cannot exceed £3 million at any time.
A qualifying employee must meet specific criteria to be eligible for EMI options. They must work at least 25 hours weekly for your company or, if part-time, at least 75% of their working time must be for your company. Additionally, they must be legally employed by a qualifying company. Employees of qualifying subsidiaries must be included in the overall employee tally when determining if a company meets the criteria for certain classifications or benefits.
For employees, individual limits apply:
- Maximum value of £250,000 in EMI options per employee
- Employee must work at least 25 hours weekly for your company
- If part-time, at least 75% of their working time must be for your company
- Employees with a ‘material interest’ of more than 30% of share capital are excluded
Grant, Exercise and Disposal of EMI Options
EMI options provide significant tax advantages at three key stages: grant, exercise, and disposal. Understanding each phase helps both companies and employees maximise the benefits of this share option scheme.
To grant EMI options, companies must meet specific qualifications, including eligibility criteria such as company size and type of trade. The date of grant is crucial as it impacts tax implications, notification requirements to HMRC, and the exercise period, with key deadlines and tax reliefs tied specifically to this date.
The EMI Options Grant Process
When employees are granted EMI options, no income tax or National Insurance contributions (NICs) are due at this stage. This represents a major advantage over non-tax-advantaged share options.
Effectively managing an enterprise management incentive scheme is crucial, as it involves updating recipient information and notifying HMRC of changes, which can be complex and time-consuming.
To establish a valid EMI scheme, companies must:
- Ensure they qualify as a small to medium enterprise with assets under £30 million
- Operate in a qualifying trade (most commercial activities except property development)
- Issue options over ordinary shares with no special rights
- Notify HMRC by 6 July following the tax year in which the options are granted
Each employee can receive options worth up to £250,000 in a three-year period. The company must create proper option agreements that clearly outline exercise conditions and vesting schedules.
Setting the Exercise Price and Market Value
The exercise price is what employees pay to convert their options into actual shares. Companies have flexibility in setting this amount, but tax implications vary:
- Market value exercise price: No income tax or NICs when exercised
- Discounted exercise price: Income tax and NICs payable on the difference between the exercise price and market value
Understanding the current market value is significant during the exercise and sale stages of share options, as it impacts employees’ ability to sell shares at a profit once the conditions of the EMI scheme have been satisfied.
Valuing shares in unlisted companies is particularly important before granting EMI options. This ensures an agreed market value with HMRC, preventing potential queries and maintaining the qualified tax status of the options.
To establish the market value, companies can request an advance valuation from HMRC. This provides certainty and protection from unexpected tax charges later.
The valuation typically applies a discount to reflect that the shares are for a private company with limited marketability. Getting this valuation right is crucial for both tax planning and employee motivation.
Selling Shares and Tax Implications
When employees sell their EMI shares, they may qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), reducing Capital Gains Tax to just 10% instead of the standard 20% rate.
However, if the company fails and the share value drops, employees may struggle to sell their shares profitably.
To qualify for this relief:
- Options must be held for at least 24 months
- The employee must work for the company during this period
- No disqualifying events should occur
A disqualifying event, such as leaving the company or failing to meet working time requirements, results in the loss of favourable tax treatment. Employees must exercise their options within a strict timeframe to retain tax reliefs.
The taxable gain is calculated as the difference between the sale price and the exercise price (or market value at exercise if higher). This gain benefits from the annual Capital Gains Tax allowance (currently £3,000).
Companies can typically claim corporation tax relief on the growth in value between grant and exercise, making EMI schemes tax-efficient for both employers and employees.
We Can Maximise Your Tax Advantages from EMI Share Options
At Plus Accounting, we specialise in helping businesses make the most of the EMI option scheme. Our experts understand the complex tax benefits these share options offer.
EMI schemes provide significant tax advantages compared to other share arrangements. When implemented correctly, they can save both your company and employees substantial amounts in tax. Additionally, EMIs allow businesses to reward employees through a tax-efficient share options scheme, which can also help offset costs against the company’s tax bills.
Key tax benefits we can help you achieve:
- No Income Tax or National Insurance on grant of options
- Only 10% Capital Gains Tax on sale of shares through Business Asset Disposal Relief
- Corporation Tax relief for your company on option exercise
Our team will ensure your EMI scheme meets all qualifying criteria set by HMRC. This is crucial as non-compliant schemes can lose their valuable tax advantages.
One of the main tax benefits of EMI options is the absence of income tax at the time of option exercise and a reduced capital gains tax rate of 14% on future sales. Additionally, EMI options come with generous tax benefits, making them a highly attractive choice for businesses.
We’ll guide you through the valuation process to establish the optimal share price. This helps maximise potential gains while minimising tax liability for your employees.
Why choose Plus Accounting for your EMI scheme:
We work with businesses of all sizes to create bespoke EMI schemes that align with your company goals. Our approach ensures you retain key talent while providing them with the most tax efficient way to receive rewards.
EMI schemes are a tax efficient option, offering distinct tax advantages such as incurring tax only at the point of award rather than exercise, and benefiting from lower Capital Gains Tax rates.
Contact us today to discuss how we can help you implement a tax-advantaged EMI share option scheme.