Enterprise Management Incentive Schemes – The Tax Advantages

June 30, 2021

Are you an employer that is looking into a share scheme for one of your employees, or perhaps to entice new talent? If you are a trading company, then an Enterprise Management Incentive (EMI) scheme might be for you.

EMIs are HM Revenue & Customs (HMRC) approved share schemes that remunerate employees with a tax favoured share option. 

It aims to incentivise and maintain employees by offering a stake in the business as part of a reward package.

How do EMIs work?

Companies can grant scheme options to eligible employees, giving the employee the right to buy shares in the company at an established price, agreed upon with HMRC.

Organisations can offer grant share options up to the value of £250,000 within three years, per employee.

If the employee exercises their option to buy shares in the company, the employee will own the shares until they sell. 

However, there is an essential checklist to go through.

Below, we have explained how to determine your eligibility and the process.

Eligibility for companies

Organisations that qualify for EMIs must be small trading companies carrying on a qualifying trade that have a total gross asset of less than £30 million, and no more than 250 full-time employees. 

They must not be owned or controlled by a parent company. 

The excluded trades include banking, farming, property development, provision of legal services and shipbuilding. 

Eligibility for employees

Directors and employees can qualify for EMI schemes if they work for at least 25 hours per week or 75 per cent of their working time. 

Additionally, they must not have a material-based interest in the company, of more than 30 per cent of the share capital of the company.

Tax benefits

If an employer grants their employee an EMI option with an exercise price equal to the actual market value (AMV) at the time of the grant, then there is no income tax or National Insurance (NI) on the sale.

However, if an employer grants an employee an EMI option with an exercise price below the AMV at the time of the grant, an income tax charge applies. The income tax liability is based on the difference between the AMV, at the date of the grant, and the exercise price. NI is also due if the shares are readily convertible assets.

If shares sell, then Capital Gains Tax (CGT) charges will apply. 

CGT on shares obtained under EMI

Employees should qualify for discounted business asset disposal relief on up to £1 million of capital gains, which is 10 per cent as opposed to the usual rate of 20 per cent.

The following criteria for this relief are as follows: 

  • The company must be a trading company or holding company of a trading group for two years immediately before the disposal.
  • The employee must still be working for the company when the shares sell.
  • The grant must be two years old before the disposal of shares.

EMI process

  • Apply for a share valuation via HMRC

We can assist in your application for a share valuation for EMIs through HMRC, which will determine a price depending on the AMV.

  • Employee communication

It is important that the option holders understand the implications of having EMI share options in your company.

  • Draw up the legal documents

Ensure there a comprehensive set of obligations for the scheme.

After the valuation is approved, you have 120 days (due to the coronavirus pandemic, usually it is 90) to sort out the legal documents.

  • Notify HMRC

Have the options been granted and all relevant documentation signed? If yes, then notify HMRC online within 92 days of the grant of the option.

Working out eligibility for EMIs can be a daunting and confusing process, which is why it is essential to seek professional advice. For more information or help, contact our expert team today.

Further reading

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