EMI share options are specifically designed for trading companies with growth potential and are intended to help such companies recruit and retain employees. They provide individuals with significant tax benefits and are much more flexible than other tax favored share arrangements.
- EMI can be used by independent quoted or unquoted companies with gross assets of £30m or less
- A company or group must have fewer than 250 full-time equivalent employees
- All employees must work at least 25 hours a week or 75% of their total working time for the company
- Up to £250,000 worth of shares can be granted to each individual
- The limit on the total value of options that can be granted under EMI is £3m
- Generally no income tax or national insurance contributions (NIC) liabilities arise on grant or exercise of market value options
- Capital gains tax (CGT) at 20% will be payable on sale of the shares unless you have held your option for 24 months and then you should qualify for Entrepreneurs’ Relief and a 10% tax rate
- The market value of shares can be agreed in advance
- A company can obtain ‘advance assurance’ that it qualifies for EMI
- Provided conditions are met, a corporation tax deduction should be available to the employing company in the period in which the employee realises a gain.
EMI is available to quoted and unquoted companies with gross assets of £30m or less. In a group, the gross assets test is applied to the group (excluding intra-group transactions).
The company must carry on a qualifying trade and there are detailed provisions in this regard. Examples of trades which do not qualify include leasing, farming, financial activities and property development.
In a group, EMI share options must be granted over shares in the parent company and at least one of the trading subsidiaries must carry on a qualifying trade.
A company granting EMI options must not be under the control of another company. However, the parent company of a qualifying group can grant EMI options to group employees.
Options must be granted to employees or directors over ordinary shares that are fully paid and not redeemable. The shares can, however, be subject to restrictions.
Only EMI options over not more than £250,000 worth of shares per individual will qualify for EMI treatment.
Options can be granted at a discount or nil price although there are adverse tax consequences. Options must be capable of being exercised within 10 years.
EMI options can only be granted to employees who are required to work for at least 25 hours a week, or, if less, at least 75% of their working time must be for the company.
Employees who have a ‘material interest’ of more than 30% of the share capital before the options are granted are excluded from participation.
The tax benefits are very generous with no income tax or NIC at the date of grant; and none on exercise where the exercise price is no lower than market value. If the option is granted at a discount, there will be income tax and NIC payable at exercise on the amount of the original discount or the gain on exercise if that is lower. It is possible for the employer to transfer its NIC liability to employees.
On a disposal of the shares the increase in value from the market value at date of grant will usually be liable to CGT at the Entrepreneurs’ Relief 10% rate of tax. If the sale takes place within 24 months from the date of grant, the standard rate of 10% and/or 20% will apply depending on whether the individual is a standard or higher rate taxpayer.
Where the company or individual does not meet the qualifying criteria throughout the life of the option, income tax is payable on the gain during the non-qualifying period (see potential pitfalls).
EMI provides generous tax and NIC reliefs for qualifying options. However, there are a number of disqualifying events which will limit these reliefs. Disqualifying events include:
- The company coming under the control of another company
- The company ceasing to meet the trading activities test
- The employee ceasing to be an eligible employee
- A significant variation in the terms of the option
- A non-commercial alteration to the share capital of the company that increases the value of shares under option.
If the option is exercised within 90 days of a disqualifying event, full income tax and NIC benefits are maintained. If the option is exercised more than 90 days after a disqualifying event then relief is only given up to the date of the disqualifying event. It is essential that companies and option holders keep EMI arrangements under review. On a sale or takeover it is possible to have an exchange of options which will protect the tax reliefs. This should be provided for in EMI option agreements.
Although EMI plans are not approved in advance by HMRC the options must be reported electronically within 92 days of grant. We suggest that the market value of shares in unlisted companies is agreed in advance with HMRC Shares Valuation.
Many EMI plans are bespoke to the company with individual rules and performance targets. BDO can help with all aspects of the design, drafting and implementation of your EMI Plan, including communication, valuation and ongoing compliance requirements. To find out more please get in touch with your usual BDO contact or Matthew Emms.