Enterprise Management Incentive (EMI) schemes are growing in popularity as a win–win staff incentive scheme. Recognised as an effective staff motivator, EMI schemes deliver the potential for considerable financial gain for staff, and this is just one reason why many of our clients are keen to set up such schemes.
In this article, we set out some of the frequently asked questions raised by clients when discussing the benefits of an EMI Scheme.
Why is it beneficial?
It is very beneficial because:-
- the employee does not pay income tax or national insurance on entering into the option;
- when the employee “buys” the shares, he does not pay any tax or income tax; and
- when the employee sells his EMI Shares he will only pay capital gains tax at 10%* provided the sale is two years after the grant of the option, and the option exercise price was at market value.
- the employee would need to remain an employee of the company working more than 25 hours per week.
*The government is considering raising this to 20%
Does the employee have to pay anything on grant of the option?
No, only when the option is exercised. Options are often exercised on a sale of the company in which case the employee buys the shares, sells them straight away and benefits from the profit.
If an employee leaves the company, what happens?
If an employee resigns or is dismissed he will lose the option. However, if an employee leaves because of ill health, or death, he or his estate will be allowed to exercise the option for a short period, though some of the tax advantages may be lost.
Will it cost the employee anything if he doesn’t exercise the option?
No, if he decides not to exercise the option he can simply walk away.
Why is the company granting the option?
The company grants the option to give the employee the same motivation as the shareholders to increase the value of the company. There is potential for significant gains at a very beneficial tax rate.
Example
Option Shares Value/Price (per share) (market value) £100.00. After 3 years the Company is sold at a price of £300 per share.
The tax treatment is as follows:-
Exercise Price £100.00
Price £300.00
Gain £200.00
*Capital Gains Tax – 40% x 25%= 10%
Profit After Tax £180.00
* with the changes in taper relief from April 2008, the effective rate of CGT at 18% is still a big improvement on 40 % income tax plus NI.
How long does an EMI scheme take to set up?
Three to four weeks. Timing for the legal documentation depends principally upon the time taken to agree the share value at the date of grant of the option with HM Revenue & Customs.
