You may be familiar with Enterprise Management Incentive (EMI) share options, you may not, but the following is an explanation of what they are, why you might find them useful and how they are getting even better. With effect from 16 June 2012 the first of the March 2012 Budget proposals comes into effect (a more than doubling of the individual limits) meaning that small-medium enterprises in particular will be able to offer a greater degree of tax-favoured incentives to their key employees.
What share options can do for your company, management and key employees
Share options can be a cost effective way of remunerating and incentivising key employees. In terms of cash, they can provide benefits in a cash-flow neutral or sometimes even cash-flow positive way – the real “cost” comes from shareholder dilution. These shareholders will, however, often be supportive of a limited “options pool” to be used to recruit, retain and incentivise management and key employees to grow the business for their ultimate benefit.
The real advantage to management/employees is that they are offered the opportunity to participate in the growth in value of the company that their hard work helps to create.
Why EMI options are so beneficial from a tax perspective
In addition to the economic benefits of share options, EMI options in particular also offer participants further tax advantages. Normally when a participant exercises a share option they are charged to income tax (and sometime national insurance contributions) on the exercise of that option based on the market value of the shares that they acquire at that time (i.e. in relation to income tax, they are taxed at 20%, 40% or 50%). In contrast, where:
EMI options are granted at an “exercise price” which is not less than the market value of the company’s shares at the grant date; and the qualification conditions continue to be satisfied,
income tax (and national insurance contributions) is not payable on the exercise of that option. Instead, participants will pay capital gains tax when those shares are disposed of based on any gains made above the exercise cost (i.e. they are instead taxed at 18% or 28%).
How EMI options are getting better – increased limits
One of the limits on the grant of EMI options is that participants cannot hold unexercised options over shares with a market value (at grant) in excess of £120,000. The UK Government announced in its March 2012 Budget that this limit was going to more than double to £250,000, subject to receiving EU state aid approval. The Government has now confirmed that the increased limit will take effect from 16 June 2012. Businesses will now have a more significant tool to attract, incentivise and retain the key individuals that they need for their future development.
Even lower taxation of option gains – relaxation of Entrepreneurs’ Relief requirements
The story does not, however, end there. Not only is the individual limit for EMI options being increased, but the Government has also announced that it will seek EU state aid approval to remove the five per cent holding condition that would otherwise be required in order for shares acquired on the exercise of EMI options to fall within Entrepreneurs’ Relief for capital gain tax purposes. This means that if shares are held for at least 12 months following the exercise of an EMI option then any gains realised on their disposal may be taxed at only 10%.
Which companies can qualify to grant EMI options
In short, the types of companies which are eligible to grant EMI options are:
trading companies;with fewer than 250 employees;who are independent of other companies; who have a permanent establishment in the UK; andwho have gross assets of not more than £30 million.