The enterprise management incentive (EMI) scheme is a tax-advantaged share option incentive scheme, aimed at entrepreneurial companies that meet certain conditions.
It is designed to assist such companies in recruiting and retaining high quality employees.
The EMI scheme is flexible enough to allow for options to be geared to future Capital growth and performance targets. So long as the options remain qualifying for EMI status throughout the period of ownership, the employee should be able to take advantage of income tax and national insurance reliefs.
To qualify to offer EMI options, a company can be quoted or unquoted but must meet ALL of the qualifying conditions.
It the company or group does not meet these tests, then EMI options are not for you.
Companies that carry out ‘excluded activities’ are not allowed to offer EMIs. Excluded activities include:
The company can decide which employees it grants EMI options to.
Employees however, have to meet the qualifying conditions. These include:
To qualify for EMI, the options/shares must meet the following conditions:
The maximum value of EMI options that can be granted is £250,000 per employee in a 3 year period.
The maximum value of EMI options that a company or group can grant is £3m.
For the purposes of these limits, the unrestricted market value of the shares must be used
The beneficial tax reliefs can be lost if before the exercise of an option:
Tax relief can still be retained if exercise occurs within 90 days of a disqualifying event.
Share valuations may be agreed with HMRC in advance of the options being granted.
Valuations for EMI schemes are valid for 90 days from the date of the agreement (was120 days due to COVID-19 relaxations).
The company must notify HMRC within 92 days of the options being granted.
The company must also file an annual return online by 6 July following the end of the tax year.
Penalties may be charged if the return is filed late or is found to contain incorrect information.
The company may be entitled to a corporation tax deduction equal to the difference between the price paid for the shares and the relevant market value.
(It is important to remember this on a sale.)
No income tax or national insurance contributions (NIC) are payable on the grant of the option. The individual does not need to report the grant of the options on their tax return.
Provided that the options are exercised within 10 years of the date of grant, and if the price at which the employee can exercise the option is at least equal to the market value of the shares when the option was granted, no income tax or NIC
The individual does not need to report the exercise of the options on their tax return in these circumstances
On sale, a capital gain or loss will arise to the employee.
The difference between the exercise price of the EMI options and the sales proceeds received is subject to capital gains tax (CGT).
CGT is charged at 10% or 20%, depending on the rate at which the employee pays income tax. If the shareholding meets the qualifying conditions for business asset disposal relief, up to £1m (max) of the gain will be taxed at a rate of 10%.