UK: Enterprise Management Incentive (EMI) - August 2016

Last Updated: 15 September 2016
Article by Smith & Williamson

What is an EMI?

EMI is a highly tax-efficient means of rewarding, incentivising and retaining qualifying employees.

It is a tax-advantaged share option scheme for smaller listed and privately-held companies. The main benefit of EMI is that employees participate in share growth through an option without incurring an income tax or national insurance liability and at advantageous capital gains tax rates. There are also generous corporation tax advantages for the employer.

The employee may hold options over fully-paid shares up to the grant value of £250,000. The total grant value of unexercised EMI options that a company can issue is £3m. The company or group has to satisfy qualifying conditions including regarding the nature of its trade. Its gross assets may not exceed £30m and the full-time equivalent number of employees must not exceed 250.

How does an EMI work?

A qualifying, broadly full-time, employee is awarded options over shares in the employing company (or parent company if a group). The option will specify any exercise price and when the option may be exercised. It may include any performance or other conditions that must be satisfied before the option is exercisable. The options must be capable of exercise within 10 years.

When the conditions are satisfied, the employee may exercise the option paying the agreed price (if any). The employee then owns the shares and will be subject to capital gains tax when the shares are sold.

The exercise price of the option may be more or less than the market value of the shares at the option grant date.

Corporation tax deduction

The employer will usually qualify for a statutory corporation tax deduction when the employee exercises the options equal to the difference between the exercise price and the market value of the shares at exercise.

Income tax and NIC relief

No income tax or national insurance liability arises on the grant of the option.

Subject to some disqualifying exceptions, where the grant exercise price is at least equal to the then market value of the shares, no income tax arises on the exercise of the option.

If the options have been granted at an exercise price below market value, there is an income tax charge on exercise based on the lower of the market value at grant or at exercise less the exercise price and any amounts paid by the employees for the grant of the option.

If a disqualifying event occurs, tax benefits can be lost after 90 days. Thereafter, any future growth in value from that date will be liable to income tax on exercise.

For companies that are listed, or where there is a market for the shares, any income tax arising from a disqualifying event or because of a discounted exercise price will be collected through PAYE and there will also be a national insurance liability.

Capital gains tax relief

A capital gains tax liability may arise when the employee later disposes of the shares. The chargeable gain will be based on the sale proceeds less the price paid to exercise the option and the amount on which any income tax liability arose on exercise, subject to the special rules for share cost 'pooling' where the employee also holds other company shares.

The employee may also enjoy entrepreneurs' relief (ER), resulting in a CGT rate of 10%, on EMI share disposals provided the option was granted at least 12 months before the disposal date. The 12 month holding period required for ER runs from the date of grant, and not the date of exercise. There is no minimum shareholding required.

How we help

Our service can include:

  • drafting customised scheme rules that comply with the legislation;
  • preparing a tax memorandum and explanatory booklet if required;
  • obtaining advance assurance from HMRC on the qualifying status of the company;
  • obtaining HMRC agreement of the market value of shares at the award date;
  • assisting with online registration and all HMRC reporting requirements.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2016.

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