The Enterprise management Incentive (EMI) Scheme is targeted at small
high risk trading companies with the aim of providing tax relief for
certain forms of equity based remuneration with the hope that they can
attract high calibre management who would be prepared to sacrifice income
for capital growth.
Under EMI a qualifying company is able to grant options to any number
of employees at the company's absolute discretion. There is an overall
limit of £3 million worth of EMI options.
Qualifying company
In order to qualify, the company must pass certain tests:
" Gross assets less than £30 million;
" Quoted or unquoted, but not under the control of another company;
" Trade carried out wholly or mainly in the UK;
" Share capital must be fully paid-up
Excluded activities
Certain trades do not qualify. These include property, finance and
hotels.
Qualifying employees
EMI options can only be granted to those who do not have a material
interest, deemed to be 30% of the ordinary share capital. The employee
must spend at least 25 hours per week, or if less at least 75% of their
working time, working for the EMI company.
£100,000 limit
An employee cannot hold EMI options over shares with a total value
exceeding £100,000. Options in excess of this amount do not qualify
for EMI relief.
Conditions and restrictions
The conditions under which options may be granted provide tremendous
flexibility to enhance and focus incentivisation. For example the options
granted could be conditional upon the company reaching profit targets
in one or more years. They can lapse upon the employee leaving the company
except under specified circumstances such as retirement or death in
service.
Tax benefits
There is no tax charge on the grant of an EMI option.
The income tax relief at exercise depends on the exercise price. Broadly
speaking, the relief is intended to exempt from income tax any growth
in the value of the shares from the date the option was granted to the
date on which it is exercised. In the simplest case, where the exercise
price is at least equal to the market value of the shares at the date
of grant, no income tax arises on the exercise of the option.
Capital gains tax taper relief
For taper relief purposes, the shares are deemed to have been acquired
on the date on which the option was granted.
As the shares are likely to be business assets, it will be possible
to exercise an option only two years after grant, sell immediately and
face only a 10% CGT charge. The base cost will be the amount paid for
the shares.
Disqualifying events
The tax advantages will be lost where rules are breached, and the option
holder needs to be aware of disqualifying events that can result in
loss of relief.
Conclusion
The EMI share option scheme has tremendous advantages for both employee
and employer. The employee gets the opportunity to acquire shares in
his employer only paying tax at 10% when the shares are sold. Prior
to exercise of the option, the employee is not at risk, and need only
exercise when sale or flotation is imminent.
The scheme provides small and medium sized enterprises with a means
of attracting, retaining and motivating key employees.