Retaining Key Staff – EMI Share Options

Staff retention is an issue that challenges many businesses. EMI share options can be a great tool to address this, help to incentivise key employees and obtain employee “buy-in”.

What are they?

A share option is a right to acquire a specified number of shares in a company at a future date for a pre-determined price. An Enterprise Management Incentives (‘EMI’) share option is a government approved, tax advantaged scheme designed to encourage employee ownership of companies.

Who are they for?

EMI are targeted at trading companies with gross assets not exceeding £30 million and fewer than 250 employees (on a full-time equivalent basis).

In general, eligible employees must work at least 25 hours per week for the company. If an employee is employed for less than 25 hours per week, they must spend at least 75% of their total working time at the company.

An employee must not already hold more than 30% of the shares in the company including any shares held by their spouse, parents, children etc.

What are the benefits?

There is no income tax charge on the grant or exercise of an EMI option provided the employee pays the current market value.

All growth in the value of the shares between grant of the option and ultimate sale of the shares is charged to capital gains tax (usually at 10% under the rules for entrepreneurs’ relief). This compares to a tax rate of up to 45% for an employee bonus.

On exercise of the share option, the company can usually obtain a corporation tax deduction based on the market value of the shares at that time.

Share valuations can be agreed with HMRC in advance so that the employee and company have certainty over the tax position.

Design

EMI share option schemes are very flexible, and the design can be tailored to your circumstances. Options can be exercised by an employee immediately following grant, at certain future dates (perhaps based on performance criteria) or on a sale or winding up of the company (an ‘exit only’ option).

Exit only options are particularly attractive to both the employee and the company because if the employee leaves, no money has changed hands at that point, and the share option will simply lapse.

Want to find out more?

Please email David Hackett or contact a member of the tax planning department at MHA Moore and Smalley on 01772 821 021.