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30 August 2017

EMI share schemes: A tax efficient incentive for key staff

Enteprise Management Incentive (EMI) share schemes provide a tax efficient way to incentivise staff by offering them share options that enjoy favourable tax benefits.

EMI schemes are available to most trading companies that have gross assets of less than £30 million and less than 250 employees, and allow the company to grant share options worth up to £250,000 per person to full-time employees or Directors (providing they don’t already own more than 30% of the company).

Options must be granted over fully paid up, non-redeemable shares and must be exercisable within 10 years of grant, but otherwise the employer has the flexibility to use shares with a variety of rights and restrictions (such as a requirement for continued employment, or the achievement of certain performance targets).

Unlike some other share schemes the grant of share options under an EMI scheme does not give rise to any tax or NIC charge on the employee at the date of grant.

There is also no tax or NIC when the options are exercised, providing the options were granted at market value. If the options were granted at a discount then tax or NIC will apply.

On a subsequent sale of the shares, the employee will simply pay Capital Gains Tax on the increase in value between the price paid for the shares and their proceeds.

However, from April 2013, most employees holding EMI shares will qualify for Entrepreneurs Relief (ER), which means only a 10% Capital Gains Tax rate on gains, even where they don’t hold more than 5% of the company’s shares (the minimum shareholding usually required to obtain ER).

There’s good news for the company too, as it can claim a Corporation Tax deduction on the gains enjoyed by the employees when they sell their shares.

The above tax benefits are best explained with an example:

An employee is granted an option to purchase shares at their market value at the date of the grant of the option of, say, £30,000. No tax or NIC is triggered at this point.

Three years later the employee exercises the option and purchases the shares for £30,000. Again, no tax or NIC is triggered at this point.

Shortly afterwards (often on the same day) the employee sells the shares to a third party for their then market value of £80,000, therefore making a gain of £50,000 on the shares.

Assuming the employee has not used their CGT annual exemption (currently £11,300) against other gains in the same tax year, they will pay Capital Gains of only £3,870 on the £50,000 gain.

The company can then claim Corporation Tax relief on the £50,000 gain made by the employee, giving the company a tax saving of £9,500 (using the current Corporation Tax rate of 19%).

Granting share options under an EMI scheme is therefore a very tax efficient tool to retain, attract and incentivise key employees.

If you would like further advice on this matter, then please contact me.

Key Facts:

  1. The EMI scheme offers tax advantages compared to other share schemes
  2. No tax or NIC generally applies for the employee when the options are granted or exercised
  3. When the shares are sold Capital Gains Tax is due on the uplift in value over the price paid
  4. Entrepreneurs Relief will be available in most cases, meaning a 10% tax rate
  5. The company can claim Corporation Tax relief on the value of gain made by the employee/s

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