How to gain Tax Advantages and Reward Your Team through The Enterprise Management Incentive Scheme
The Enterprise Management Incentive Scheme (EMI) is a government introduced scheme which offers a tax advantaged share option for employees. We will look at the benefits of the scheme, the qualifying conditions and the steps required to implement the scheme:
Quick and easy implementation:
• Any numbers of directors and employees may participate at any time subject to some limitations.
• Exercising of the options may be conditional.
• EMI’s avoid the income tax charge up to the top rate of tax and employee’s (NIC) that would normally apply to the exercise of an option. The employing company avoids the employee’s NIC liability.
• Capital gain tax at 28% is applicable to growth in shares acquired under the option. Entrepreneurial relief (“ER”) is available to qualifying individuals reducing the capital gains tax relief to 10%.
• The 2012 Finance Bill proposed that ER should be available to employees even if they hold less than 5% of the company as long as the shares are held for a minimum of one year. The other ER conditions need to be met. Therefore the earliest shares can be held under the new rules will be 6 April 2013.
• No Income Tax (“IT”) or national insurance on grant.
• No IT on the exercise of options if executed within 10 years of the grant. The exercise price needs to be at or above the market value of the shares at the date of the grant. If the price is lower, IT may be applicable against the difference between the exercise prices and the lower of the unrestricted market value or the price the shares were issued for.
• The company gets a corporation tax deduction on the exercise of the option, by reference to the market value of the shares less the amount paid for them.
Option arrangement tests to secure tax advantages
• the option must be granted for commercial reasons, i.e. to attract and retain staff.
• the maximum value of unexercised options per employee is £250,000 based on the unrestricted market value of the option shares.
• Once an employee reached the £250,000 limit, any further options will not receive the beneficial tax treatment unless the secondary options are issued after three years of the date of grant of the last qualifying option (even if they have been exercised or released).
• A maximum of 250 employees may hold EMI options in the same company at the same time, subject to a maximum £3 million of the total shares under option.
The Company / Group
• Gross assets must not exceed £30 million.
• Issuing company must be independent and not under the control of another company;
• Any subsidiaries must have a minimum holding of 51%.
• No more than 250 full time employees (or equivalent employees).
Company must carry out a qualifying trade – the following are non qualifying trades:
• Land dealing, commodities, shares, or other instruments.
• Property development.
• Dealing in goods not in the course or ordinary retail or wholesale trade.
• Insurance, banking, cash lending, financing, invoice factoring or hire purchase.
• Legal or accountancy services.
• Leasing activities or the receiving of royalties.
• Farming or market gardening.
• Woodland farming or occupation.
• The running of a hotel or related property.
• Operating residential care homes or nursing homes or related properties.
• The trade must be carries out wholly or mainly within the UK on a commercial basis with a view to making a profit. The company need not be resident nor incorporated in the UK.
• Must be employed by the company or a qualifying subsidiary, he or she may be a director of the company.
• Must spend a minimum of 25 hours a week or 75% of his or her working time on the business if less than 25 hours.
• Options are not available to an employee who controls or could control, directly or indirectly, 30% of the ordinary share capital of the business.
• Only for fully paid up non redeemable ordinary shares.
• Must be exercisable within 10 years. If it is not exercised within 10 years the tax advantages will be lost.
• Must be made by written agreement, under schedule 5 ITEPA 2003, detailing the date of the grant, the number of shares involved, the option price, the time and method of exercise, any restrictions and any performance conditions.
• It may not be assigned.
• It may be exercisable after death within one year of the death.
• It must be granted by reason of employment with the Company or Group Company.
Events which may disqualify the relief
• Ceasing to meet the independence test.
• Ceasing to carry on a qualified trading activity.
• A non qualifying conversion of the share capital into another instrument, or certain alterations to the share capital of the company.
• Certain variations to the terms of the options.
• The company does not cease to qualify, if the gross assets exceeding £30 million.
• If a disqualifying event occurs, the options will nee d to be exercised within 40 days to retain the tax benefits. If the exercise does not occur a tax charge will arise on the uplift between the disqualifying event and the date of exercise.
Company Reorganisation, release or replacement of options
• It may be possible to roll up the options in respect of the acquiring company in a takeover or reorganisation.
• Releasing an option will give rise to an income tax charge on any amount received for the release.
• Existing options may be replaced by EMI options under certain circumstances subject to some restrictions.
Process of implementing an Enterprise Management Incentive Scheme
• Confirm the company qualifies for offering Emi options, advanced clearance can be obtained from the HMRC.
• Value the shares of the company which can be pre agreed with the HMRC.
• Grant EMI option(s) through the issuance of the option agreement and a board minute.
• The HMRC needs to be notified within 92 days of the grant on the prescribed notification form.
• The option needs to be exercised to acquire the shares or the option could be allowed to lapse.
• If the shares are purchased at a discount to market value on the date of grant a written joint election may be needed no later than 14 days after the execution of the option.
Please feel free to contact TaxAgility on 02087802349 should you require any further information.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstances.