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Enterprise Management Incentives (EMI) shares

May 18, 2016

Advice on EMI shares from Optimise Accountants

If you own a small business such as a letting agent and are looking for a way to motivate your employees without paying out large bonuses, you might want to consider Enterprise Management Incentives (EMI). These are very similar to other company share option plans in the way they operate — they allow an employer to reward selected employees with tax-efficient share options.

A company will grant share options to an employee, which give the employee the right to buy shares within a specified period at a fixed price. To qualify for favourable tax treatment, the options must be exercisable within 10 years of being granted.  In most instances, there will be no tax to pay on the exercise of the option.

There is never a tax charge on the grant of an EMI option. However, if the option is exercised more than 10 years from being granted, it is treated as a non-tax advantaged option. The difference between the market value of the shares at exercise and the cost of the shares is charged to income tax.

If the option is exercised within 10 years from grant, assuming there was no discount on the shares at the date of grant – i.e. if the option price is the same as the market value of the shares at the date the option was granted – there will be no tax to pay when the options are exercised.

In all instances, there will be a capital gains tax (CGT) liability on the employee on the ultimate disposal of the shares. However, EMIs granted after April 2012 qualify for entrepreneurs’ relief, so the rate of CGT is reduced to 10%.

Example: EMI Ltd grants options to Mr Employee in December 2013. The options can be exercised at any time before December 2023. The options give Mr Employee the right to buy 40,000 shares at £2.50 each. The market value of the shares at the date the option is granted is also £2.50. Mr Employee exercised his options in July 2015. The market value of the shares in July 2015 was £4.50 per share. Mr Employee then sells the shares, realising an £80,000 profit. He has used his annual CGT exemption elsewhere, but only has a CGT liability of £8,000 thanks to entrepreneurs’ relief.

In order for an option to be a qualifying option, it must be granted for genuine commercial reasons, to recruit or retain an employee in a company. An option does not qualify if it is granted as part of a scheme or arrangement of which the main purpose (or one of the main purposes) is to avoid tax.

Individuals are only eligible for EMI options if they are employees of the company whose shares are the subject of the options, or, in the case of a group, employees of any qualifying subsidiary of that company. Directors are classed as employees of a company, and so as long as directors meet the criteria set out for employees, they will also qualify for EMI. Employees must work at least 25 hours per week in the business.

Criteria for setting up an EMI scheme

Practical steps you should now take to set up an EMI incentive scheme

It is one thing to understand the theory but it is another to put it into practice. This is why I have written a step-by-step guide to implementing this strategy.

Step 1
The company must register the scheme and notify the details of the option agreement to HMRC at enterprise.centre@hmrc.gsi.gov.uk within 92 days. HMRC thereafter has the right to raise any queries about the option within 12 months.

Step 2
The company must also send a copy of its latest available accounts and the accounts of any subsidiaries with a permanent establishment in the UK, an up-to-date copy of the Memorandum and Articles of Association of the company and details of any proposed changes, and details of all trading or other activities carried on, or to be carried on, by the company and its subsidiaries.

Step 3
The option must be in the form of a written agreement between the person granting the option and the employee. The agreement must be retained by the company so that it can be inspected by HMRC if an enquiry is opened into the option.The agreement must state:
– the date the option is granted,
– that it is granted under the provisions of Schedule 5,
– the number, or maximum number, of shares that may be acquired or the formula that will be used for calculating this,
– the price (if any) the employee will pay to acquire the shares, or the method by which that price will be determined,
– when and how the option may be exercised,
– details of any restrictions on the shares,
– any conditions such as performance conditions affecting the employee’s entitlement, and
– whether there is any risk of forfeiture.

Next steps

If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar.
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If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.



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Telephone: 0115 939 4606
Email: simon@optimiseaccountants.co.uk