Enterprise management incentive (EMI) share options are amongst the most flexible and generous of the UK’s tax-advantaged share incentive arrangements and they are about to get even better.
EMI options are intended to help small and medium sized companies recruit and retain people with the skills to help them grow and succeed. As a result, they can only be granted by companies whose gross assets are less than £30 million and who have fewer than 250 employees.
As things currently stand, the limit on the value of shares subject to EMI options which can be granted to any one employee is £120,000, a significantly higher amount than is offered by the alternative tax-favoured Company Share Option Plan (CSOP).
As with any other share option, companies can secure a corporation tax deduction in respect of EMI options exercised by their employees.
Perhaps most significantly, the fiscal position of a UK taxpayer who is granted an EMI option is highly advantageous. As long as the exercise price is at least equal to the market value of the company’s shares at the date of grant, the exercise of the option will not normally give rise to any income tax or national insurance liabilities.
Instead, the individual will pay tax on any capital gains that he or she makes when the shares are ultimately sold. In other words, the rate of tax they pay on EMI option gains is – depending on whether they are a basic, higher or additional rate taxpayer – either 18 or 29 per cent. This compares with respective income tax rates of 20, 40 or 50 per cent.
In order to qualify for EMI options an employee needs to devote at least 25 hours a week – or, if less, 75 per cent of their total working time – to the company’s business. This requirement effectively rules out non-executive directors.
In his 2012 Budget, the Chancellor George Osborne announced three specific improvements to EMI options.
Firstly, the limit on the value of shares subject to outstanding options that are held by an employee will now more than double from £120,000 to £250,000.
He also announced that academics who work for qualifying companies may, in future, qualify for EMI options.
Finally, any gains made on shares acquired by exercising EMI options will become eligible for capital gains tax entrepreneurs’ relief. This effectively means that any gains made by employees will be taxed at as little as 10 per cent, making it an even more financially attractive means of incentivising key people.
This is a substantial change in the scheme – previously the shares acquired on an EMI option would not qualify for entrepreneurs’ relief unless the employee held more than five per cent of the company’s shares/voting rights.
The shares will, however, still require to be held by the employee by for at least a year before their eventual sale in order to qualify for entrepreneur’s tax relief.
The first of these improvements to EMI options – the increase in the individual EMI option limit – will take effect from June 16. As far as the change to entrepreneurs’ relief, this is expected to be included in next year’s finance bill, to take effect in relation to any shares acquired through EMI options on or after 6 April 2012.
Finally, the expansion of the individual qualification requirement to include academics who work for qualifying companies is likely to be contained within a consultation which is expected to be published later this Autumn.
Ultimately, these measures will make EMI options more accessible and tax effective.
These improvements to EMI should be welcomed by SMEs as an attractive way to reward and further incentivise those people who make a business successful and to attract new talent into thriving SMEs.
For more information on EMI share options or share schemes generally please contact Richard Murrall on 01952 211046 or email him at email@example.com