Why consider an EMI scheme?
If, as an employer, you gave shares to an employee outright, they would be taxed on the market value of the shares. Depending on the value given, they could then face a hefty tax bill and have no means to pay it.
An EMI scheme on the other hand is a win-win for everyone. It’s a HMRC approved scheme which can help your company grow and lock in key people at the same time.
Tax benefits of an EMI scheme
The beauty of an EMI scheme is that there is no tax to pay on granting the share option – either by the employee or the employer.
There are significant tax advantages when the shares are sold later too, such as:
- The employee can qualify for Entrepreneurs Relief, paying just 10% Capital Gains Tax on the gain rather than the standard 20%.
- The company gets a tax deduction against its profit, being the difference between the market value of the shares at the date of exercise and the market value shares when first granting the option.
Conditions of EMI schemes
EMI schemes are aimed at encouraging small, higher risk companies to grow but they come with a few conditions.
Your company:
- Must not be under the control of another company (so if there is a group, your employee needs to be given an option over the holding company shares)
- Can’t have gross assets over £30 million
- Must carry on a ‘qualifying trade’. The main trades excluded are property development, hotels, farming, banking, legal and some professional services
- Must have less than 250 employees.
Your employee
- Must spend 25 hours or more per week or 75% of their working time (whichever is lowest) working for the company
- Must control 30% or less of the company’s share capital.
You decide which employees to offer share options to, and you can also offer different people different percentages. The options can lapse if your employees leave your employment. If they leave you, they lose their share options.
The share options being granted:
- Must be for commercial reasons, such as to recruit or retain an employee, and not for tax avoidance
- Have a market value limit per employee of £250,000 – anything above this is non-qualifying
- Have a total market value of un-exercised options of £3 million or less
- Relate to fully paid non-redeemable ordinary shares
- Are written in a formal agreement with the employee setting out the scheme’s conditions
- Must be capable of being exercised within ten years of being granted.
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