What is EMI?
EMI allows companies to grant options (rights to acquire shares in the future) to qualifying employees on a highly tax efficient basis.
EMI can be used by both private and smaller listed companies alike (whether in the UK or not) and either for targeted grants to specific key employees or on a wider (even all-employee) basis. EMI can form a tax efficient part of a company’s succession planning (bringing selected key managers through to have a stake in the business) or be used as a pure incentive arrangement.
What are the benefits of EMI?
EMI offers significant flexibility and arrangements can be designed in such a way as to meet a company’s specific requirements and business drivers. Implementation and administration is also streamlined when compared to other HM Revenue and Customs backed incentive plans.
EMI confers real tax benefits on both employers and employees resulting in:
For the employer:
For the employee:
No income tax and no employees’ NIC on either the grant or exercise of EMI options (provided certain conditions are met); and
Capital gains tax should apply to the growth in value of the shares at a rate of 18% (possibly 10% if certain conditions are met for entrepreneurs’ relief). There may also be scope to use annual exemptions and spouse transfers to further reduce tax on employees.
Who can use EMI?
Certain requirements must be met by both the company and the employee in order for options to qualify as EMI options. These requirements include:-
For the company:
The company’s gross assets must not exceed £30 million on the date of grant of the options;
The company must carry on a trade wholly or mainly in the UK or be the holding company of a trading group;
The company must not be involved to a substantial extent in certain types of trade/activity. These “excluded activities” cover dealing in land and financial instruments, dealing in goods (other than retail or wholesale distribution), banking, insurance, money lending and other financial activities, leasing or receiving royalties or licence fees (subject to certain exceptions), legal or accounting services, property development, coal and steel production and shipbuilding, operating or managing hotels or nursing homes, woodlands, farming, market gardening and forestry;
The company must be independent (i.e. not under the control of another company);
If the company controls any other company then that other company must be a 51% subsidiary of the company; and
With effect from 21 July 2008, the company must not have 250 or more full-time employees (note that this takes into account part-time employees who are in effect treated as fractions of full-time employees).
Slightly different criteria apply where the company is part of a group of companies.
For the employee:
What if EMI isn’t available?
If a company does not qualify for EMI, Wright Hassall can assist in relation to alternative forms of equity incentive which may provide a flexible and tax efficient way of motivating and retaining employees. For more information on alternative arrangements click here.
What are the limits?
Each employee can hold EMI options worth over £120,000 of shares (valued at the date of grant). Companies may grant EMI options of up to £3 million (again valued at grant).
How Wright Hassall can help
Designing an EMI plan to match a company’s commercial objectives;
Drafting the documentation and managing the process to give effect to grants under EMI;
Communicating the EMI plan to employees so that its retention and motivation impact is maximised;
Providing ongoing assistance and administrative support, including HMRC reporting; and
Managing the ultimate exercise of options and impact on EMI options of corporate transactions.
