Enterprise Management Incentives
Written by Ray Coman
The Enterprise Management Incentive Scheme offers employees tax concessions on the option to buy shares in their employer’s company.
Conditions for the company
The scheme is aimed at trading companies with gross assets of not more than £30 million. The company cannot be involved in:
- The development or management of property, or the provision of hotel or care home services.
- Investment activities such as share dealing, money lending or leasing.
- Farming, legal or accounting services.
The value of shares which are unexercised options cannot exceed £3 million at any time. The company can be quoted or unquoted, with trading activities mainly in the UK. The company must have less than 250 full time employees.
Any employee or director can participate, provided they work for the company at least 25 hours a week or, if less than 25 hours, for at least 75% of their working time. The options do not have to be available to all employees. However those participating cannot control more than 30% of the company. Each participant can hold options on shares with a value of £250,000 at the grant date. After three years from the date the most recent EMI grant, further options can be issued up to the £250,000 limit.
If the value is greater, the first £250,000 share options will be covered by the EMI rules and the surplus will be taxed following the rules for unapproved share options.
Income tax implications
When the shares are exercised, there would only be a tax liability on the amount by which the shares options were discounted. Therefore, provided the strike price is not less than the market value when the shares are granted, the exercise would give rise to neither income tax nor national insurance.
If the shares are offered at a discount then the income tax is assessed on whichever is the lower of:
- The difference between exercise price and market value when the shares were granted; and
- The difference between exercise price and market value when the shares were exercised.
Capital gains tax implications
The amount paid for shares, plus any amount subject to Income Tax on exercise, is the base cost for Capital Gains Tax purposes. Where there has been no discount, capital gains tax will be calculated on the difference between sales proceeds and exercise price. Dealing costs are tax deductible.
Entrepreneurs’ relief is usually available on EMI shares:
- It is usually a condition that a person has at least 5% of the shares to qualify for entrepreneur’s relief. However, there is no minimum shareholding for EMI shareholders.
- To be eligible for the relief, shareholders are usually required to have owned the shares for 12 months. For EMI shareholders, the 12 month minimum holding period starts with the date that the share options are granted.
The effect of entrepreneur’s relief is that the gain is subject to tax at just 10%.
The company enters into a share option agreement with each employee separately and notifies the details to HMRC within 92 days. HMRC have a facility for self-certifying tax advantaged employment related securities.
Unlike other tax advantaged share schemes, there is no minimum period for which EMI options must be held. The employee must, however, be able to exercise the options within 10 years of their being granted.
The cost of administering an EMI scheme can be deducted from profits for corporation tax purposes.
The tax regulations on the Enterprise Management Incentives are set out in Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003