CGT has risen but EMI option schemes continue to be a great way to incentivise staff

Generous tax benefits

Enterprise Management Incentive (EMI) is an HMRC initiative which allows companies to offer to its employees an option to acquire shares in the company with generous tax benefits.

• Income Tax and NIC: There will be no Income Tax or National Insurance (employer or employee) payable on the exercise of an EMI qualifying share option. This is particularly attractive given that the biggest increase in tax introduced by the most recent budget is the increase in employer’s NI. It is also worth noting that the exercise of non-EMI, or ‘unapproved’ options will be fully chargeable to tax.
• Capital Gains Tax: Any disposal of shares acquired through the exercise of an EMI option will be subject to CGT, however if BADR applies to the EMI option then CGT will be at the reduced rates outlined above, subject to a two-year minimum holding period.
• Corporation Tax: The employing company will receive a Corporation Tax deduction calculated on the difference between the EMI option exercise price (the amount paid by the employee to acquire the shares) and the market value of the option shares at the time of exercise.

Flexibility of design

Given the great tax benefits of an EMI scheme, it is no wonder that HMRC has laid down strict eligibility criteria for both companies and the employees seeking EMI relief. See our guide for more details on this. However, provided these conditions are met, there is flexibility around the design of the EMI scheme and it can be tailored to meet the needs of the business.

Examples of the types of issues that companies will generally consider when designing their scheme are:

• Vesting: Whether the option award should accrue to the employee over a period of time or whether specific performance milestones should be incorporated into the vesting arrangements (as distinct from exercise conditions, on which see more below);
• Exercise: Whether the option should be ‘exit only’ meaning that it is only be capable of being exercised and converted to shares on the occurrence of an exit event (such as a share sale, asset sale or listing), or whether the options should be exercisable upon vesting;
• Lapse: Whether the option should lapse if the employee leaves the company, or whether they should be allow to retain any portion of the option which has vested during the employee’s time with the company, provided that they are a ‘good leaver’; and
• Share class: Which share class the option should be over and whether to introduce a new class of share over which the option will be granted (for example a non-voting class of shares).

That said, in addition to complying with HMRC’s rules around EMI eligibility, there are also a number of conditions that need to be met in order to ensure that the terms of the option are EMI qualifying (some of which can be quite nuanced) and a number of associated pitfalls, so expert advice is highly recommended. However, once it is established an EMI scheme is likely to be relatively low cost and easy to administer.

EMI option schemes are the most tax efficient and flexible government-approved share incentive scheme available making them a great way to incentivise employees.