Retaining key staff? Let’s talk over the options…
The incentivisation and retention of key staff is crucial for entrepreneurial companies in an increasingly buoyant market where the skills of their employees are in demand. This is the first of a series of blogs on share options where we will look at the benefits of EMI share options. Whether you have a scheme in place already or are considering putting one in place, check out our blog over the following weeks where we will be providing some practical tips on structuring EMI schemes, the alternatives to EMI schemes and what to look out for on exit.
Enterprise Management Incentives (“EMI“) are tax advantageous share options, which are designed to help companies recruit, retain and reward employees for taking a risk by investing their time and skill to help the company achieve its potential. EMIs are a flexible scheme that can be offered to employees or directors to incentivise them in their work with the company and can include bespoke conditions in each contract to encourage that employee to focus on the key business drivers.
Who is eligible?
Most businesses are eligible for this scheme, but there are certain conditions for a company to meet:
- it must carry out a qualifying trade (broadly speaking this is any trade, except banking, insurance and property companies);
- the gross assets of the company must not exceed £30 million;
- it must have fewer than 250 full-time employees;
- it must be independent and not be under the control of any other company.
For an employee to be eligible to participate in the scheme, they must:
- work for the company for at least 25 hours a week, or for at least 75% of their paid working time;
- not hold more than 30% of the ordinary share capital of the company;
- not hold more than £250,000 of unexercised qualifying EMI options.
So what are the benefits?
For the company:
- The cost of setting up and administering the EMI options will be a deductible expense against corporation tax;
- A corporation tax deduction is usually available when the employee exercises the options
- If incentivised staff end up leaving the company, the sacrifice of option entitlements tends to be easier to manage than the sacrifice of shares
For the employee:
- No income tax or national insurance is payable when EMI options are granted;
- When the shares are sold after the option has been exercised by the employee, the employee will be liable for CGT, rather than income tax. In some situations, entrepreneurs’ relief may be available which reduces the rate of capital gains tax payable to 10%. To qualify the employee only needs to have been granted options at least 12 months before a sale of the shares and there is no requirement to hold voting rights in the company as is usually the case for entrepreneurs relief.
A worked example
- EMI options are granted to a key employee over 4 shares, which amount to 4% of the company’s issued shares
- HMRC agree a valuation of £10 per share when the options are granted
- The company is later sold for £10 million, paying out £100,000 per share
- The option holder will make a chargeable gain of £400,000 – £40 = £399,960.
- If entrepreneurs’ relief is available he will pay capital gains tax of just £39,996
- If the employee did not receive EMI options or entrepreneurs relief, tax could be payable at a rate of up to 45%, resulting in up to a maximum £139986 of additional tax being due!
EMI options have clear benefits for both companies and staff and should be seen as a key driver in your company’s growth plans. In our experience, for most high growth tech companies EMI schemes represent one of the most tax effective and flexible schemes for incentivising and retaining staff and are a worthwhile investment from an early stage. Look out for our upcoming blogs on this over the following weeks for further practical tips and advice. In the meantime if you are interested in setting up an EMI option scheme, feel free to get in touch with an expert by contacting Angus Bauer, Partner at Ashfords LLP on email@example.com
Article produced in partnership with Angus Bauer and Rory Suggett at Ashfords.