EMI Options are enterprise management incentives. They are a type of employee share option offered by small trading companies to incentivise its employees.
EMI options enjoy favourable tax treatment. They can be granted under a set of plan rules or a stand alone agreement.
There are certain statutory requirements which need to be fulfilled if the option is going to enjoy the favourable tax treatment.
Which Companies Can Grant EMI Options
If a Company wants to grant EMI options then it must:
(a) be a trading company or the holding company of a trading group
Certain activities such as leasing, property development, banking, insurance, money lending, other financing activity, farming, operating hotels, ship building are excluded activities when determining whether a company is trading or not.
(b) have gross assets of not more than £30 million
(c) have less than 250 full-time employees
(d) be independent of other companies i.e. it must not be a 51% subsidiary of any other company
(e ) Its subsidiaries (if any) must be qualifying i.e. the Company wanting to grant EMI options, needs to have control of its subsidiaries and therefore must own 51% of the ordinary share capital of such subsidiary:
(f) permanent UK establishment
(g) have not already granted EMI Options over shares that are worth over £3 million (valued at relevant date of grant).
What Shares can be used in Granting EMI Options?
EMI options must be over.
(a) Ordinary share capital, which can include shares with no dividend rights.
(b) Fully paid; and
(c) Non redeemable
EMI options can be granted over a special class of employee shares. As a result, the rights under these shares may be reduced.
Growth shares or Hurdle shares can also be awarded.
To gain Entrepreneur’s Relief under TCGA 1992 as amended the shares must be under EMI option but they do not have to represent 5% of shares and voting rights in the Company. Therefore, shares can be non-voting.
Options can be granted over new issued shares or transferred shares.
If new shares are being issued and the exercise price under the option is nil then one needs to make sure such shares are not issued at a discount i.e. below par value.
Who Can Be Granted an Option?
An individual who is granted an Option:
(a) must be an employee of the company granting the option or employee of the Company’s group
(b) must work at least 25 hours per week or if less 7% of their working time
(c) cannot have a material interest in the company i.e. own any shares, 30% of shares or more or ability to control 30% of company
(d) must be an employee who does not already own EMI shares at the date of grant worth more than £250,000
If an EMI option is to qualify for tax treatment it must adhere to the rules under Schedule 5 Income Tax (Earnings and Pensions) Act 2003 (ITEPA) including notifying HMRC of the grant of the option within 92 days using ETS Online Service.
What is the Favourable Tax Treatment?
On grant – there is no income tax liability.
On exercise – there is no income tax liability if the exercise price was at least equal to the market value of shares of grant eg:
if market value @ grant = £3 If exercise price = £3
No income tax
But - if market value @ grant = £3
If exercise price = £1
Income tax is payable on £2 difference
Sale of option shares – CGT may be payable over any gain over and above the market value at date of grant.
Shares held under EMI options qualify for Entrepreneur’s Relief (ER) under Taxation of Capital Gains Act 1992 as amended by – lowering the effective rate of Capital Gains provided the relevant conditions are met. The holding period starts from date of grant of the option. The option must be held for 1 year before disposal to qualify for ER amongst other things.