Since its introduction in 2000, the Enterprise Management Incentive Scheme (EMI) has proved to be a popular means of delivering share options to employees whilst attracting very favourable tax treatment. This favourable tax treatment is due to be further enhanced from 6 April 2013, with HMRC extending entrepreneurs' relief from capital gains tax (CGT) to disposals of shares acquired under EMI options.
EMI – main features
Specifically targeted at small, higher risk trading companies – the policy goal was to help these companies to recruit and retain high calibre individuals by allowing them to offer EMI options so benefitting the overall economy:
- Allows employers to deliver share options worth up to £250,000 at the date of grant;
- Offers tax efficiencies for both the employee receiving the option and their employer. Typically the employee will pay no income tax on the EMI options. In fact, the only tax payable by the employee comes in the form of CGT on the growth in value of the shares between the date of grant and eventual disposal – however, further significant tax savings are possible with the extension of CGT entrepreneurs' relief;
- The employer obtains a corporation tax deduction equivalent to the gains made by employees exercising EMI options against its own profits chargeable to corporation tax. This sometimes means significant tax relief with no equivalent cash outlay; and
- Flexibility in terms of design – no minimum period for which an option must be held (although at least 12 months is recommended for tax purposes), options can be awarded over shares with particular rights, performance conditions can be specified and employers can make awards on a discretionary basis (does not need to be "all employee plan").
Qualifying conditions
To benefit from this favourable treatment, there are a number of conditions that need to be satisfied. These include:
- The company carrying on a "qualifying trade"
- The company must be "independent", so cannot be a subsidiary or under the control of another company; and
- EMI options cannot be granted to any employee who controls, or could control, (directly or otherwise) more than 30% of the ordinary share capital of the company.
Entrepreneurs' relief
Where capital gains qualify for entrepreneurs' relief, CGT is charged at a bargain basement rate of 10%, rather than the normal rate which in the majority of cases will be 28%.
The main eligibility criteria to qualify for the 10% rate is for the individual to hold 5% of a company's share capital. However, from 6 April 2013 the 5% test will cease to apply where shares are acquired on the exercise of EMI options thus extending the availability of entrepreneurs' relief to all disposals of EMI option shares, regardless of whether the option holder holds 5%, provided:
(i) the employee holds the options/shares for a minimum of 12 months; and
(ii) they remain an employee/director of the company throughout that period.
For those companies that qualify for EMI and wish to deliver equity to employees, EMI is the obvious choice. The extension of the entrepreneurs' relief regime makes EMI even more attractive and provides a number of planning opportunities which our Pensions & Employee Benefits Team would be happy to discuss with you.
Summary of tax treatment
Tax treatment |
EMI |
Option price |
£10,000 |
Value on exercise and sale |
£50,000 |
Gain |
£40,000 |
Income tax and NIC |
Nil |
Subject to CGT |
£40,000 |
Annual exemption |
£10,600 |
Taxable capital gain |
£29,400 |
CGT (assume 28% or 10%*) |
£8,232 £2,940 |
Net gain (40% taxpayer) |
£31,768 £37,060 |
Net gain (50%/45% taxpayer) |
£31,768 £37,060 |
Corporation tax saving (24%) |
£9,600 |
*10% CGT rate available for options exercised on or after 6 April 2013, subject to 12 month holding period since the date of grant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.