NOTE: This document does not provide legal advice – it is only intended as a discussion draft to be updated and modified to fit the circumstances. The publishers and authors shall not be liable to any person with respect to any loss or damages caused or alleged to be caused directly or indirectly by the information or any mistake in this document. In particular, all statutory references should be checked and users are reminded that changes are continually being made to the law and the document will not be up to date. [24 August 2011]
SHARE OPTIONS – ENTERPRISE
The Enterprise Management Incentives (EMI) share scheme is intended to assist smaller high risk companies by enabling them to grant tax efficient share options as a means to incentivise high calibre employees. Prior to EMI companies wishing to use share options as a means to recruit and retain employees without offering high salaries had either to suffer the consequences of potentially high taxes or alternatively set up cumbersome and restrictive approved share option schemes.
EMI is intended to be considerably more tax efficient and flexible than the traditional arrangements for share option schemes. For example:
The EMI scheme requires no formal share option scheme - options are granted by a single written agreement with the relevant employee;
There is no minimum exercise price (although if options are granted at a discount, there will be a tax liability on the discount);
Options may vest immediately and may remain exercisable for up to 10 years;
Options must be over fully paid up ordinary shares although the shares may have limited or no voting rights and may be subject to other restrictions.
There are a number of formalities - although there is no limit on the number of employees who may hold EMI options the value of options per employee is currently limited to £120,000 (this is the maximum limit in a three year period starting with the date the options were granted). In addition there is an overall maximum limit of £3 million worth of shares over which EMI Options may be granted by any company. The company must be an independent company trading in the UK with less than 250 employees. The company must agree the value of the shares with the Inland Revenue unless the shares are listed on a recognised investment exchange. In addition, the company must have gross assets of no more than £30,000,000. Options may not be granted over shares in a subsidiary company.
Full time employees may be granted EMI options. In addition, part timers will also qualify if they commit 75% or more of their working time to the business of the company. Consultants, non-executive directors and contractors will not qualify for EMI options.
EMI options may not be granted to any person who, together with their relatives and associates, holds more than 30% of the shares in the company.
Certain companies will not qualify for EMI options if their activities are designated as excluded activities. Examples of excluded activities include the following:
There is no approval or clearance process required but companies can apply for advance assurances that they qualify for EMI.
Each grant, however, must be covered by a written agreement between the company and the employee specifying:
If the option qualifies as an EMI option, the company must notify the Inland Revenue within 92 days of granting the options. The notice must be accompanied by the relevant form. The Inland Revenue has 12 months after it receives a notice to disqualify an option for EMI tax treatment.
Overview of Tax Advantages
No income tax or national insurance (NIC) is payable on the grant of EMI options. Companies, however, must ensure that the options awarded are capable of being exercised within 10 years of the date of the grant and are actually exercised within that period in order to qualify for income tax and NIC relief. In addition, provided that the exercise price is not less than the market value of the shares at the date of grant, no income tax or national insurance will be payable on exercise. If the EMI option is granted at a discount, income tax is payable on the amount of the discount.
Capital Gains Tax
Capital gains tax is payable on any EMI shares at the time of their disposal. However EMI shares receive preferential treatment for capital gains tax purposes. They are treated as “business assets” for the purposes of capital gains tax taper relief and they are considered as being acquired at the date of grant. Therefore provided that the shares are sold at any time two years after the date of grant and subject to the annual exempt allowance of £9,600 (for 2008-09 tax year) capital gains tax will normally be taxed at the rate of 18% rather than 40%.
The EMI regime should be of great benefit to small companies wishing to incentivise their key employees by way of tax efficient options. The tax benefits will operate to the advantage of both the company and the option holder.
For further information please contact:
Tom Mackay or Jennifer Carter Shaw, Solicitors, Mackay Carter Shaw LLP
Tel: 0207 193 1009 or 1016
Email: email@example.com or firstname.lastname@example.org
This note is only a general review of the subjects covered and does not constitute legal advice which will vary depending on the circumstances of each case. No legal or business decision should be based on the contents of this note.
LEGAL GUIDE – SHARE OPTIONS – ENTERPRISE MANAGEMENT INCENTIVES