The Enterprise Management Incentive (EMI) is a flexible employee share option scheme designed for smaller companies. A share option is the right to acquire shares in a company on terms set out in an option agreement. This can be a great financial incentive for employees to work harder in order to help the business succeed, and is a useful tool to help small, growing companies acquire and retain valuable employees. Nottingham chartered accountants Clayton & Brewill provides some guidance on the recent changes that might affect your EMI schemes.
An EMI scheme can be extremely tax-advantageous for both the employer and the employee. As the scheme is approved by HMRC, employees benefit from paying no income tax and national insurance when the grant is issued and exercised. They also pay a reduced rate of capital gains tax (10% rather than 18% / 28%).
What’s new with EMI schemes?
Changes to Entrepreneurs’ Relief were made in last Autumn’s budget and may affect an employee’s capital gains tax status.
For disposals of EMI shares on or after 6 April 2019:
- As of 6 April 2019, the one year holding period from the date of the grant has been extended to two years. This applies to new and existing EMI options.
- The new two year minimum holding period requirement for EMI options will include the period the option is held; if the option is held for two years this condition is met.
- If this two-year holding period is not met, employees will be required to pay 20% capital gains tax rather than the anticipated 10%.
- Where the business ceased or ceased to be a trading company (or holding company of a trading group) before 29 October 2018, the original 12-month period will still apply.
For disposals of EMI shares acquired after 5 April 2012:
- There is no minimum shareholding requirement in order for shares acquired under an EMI option scheme to qualify for Entrepreneurs’ Relief.
- The normal 12-month minimum holding period requirement for Entrepreneurs’ Relief is modified and includes the period the option is held, so if the option was held for one year the 12-month holding period is met.
- The effect is that EMI share option holders will, if their options are exercised and they are able to dispose of their shares be on the same footing as shareholders who have held shares for a year.
Tax-advantaged status can be lost if the company:
- Does not set up its EMI within the terms of the legislation.
- Fails to notify HMRC of the grant of an EMI option within 92 days, or
- If a disqualifying event occurs and option holders fail to exercise their options within 90 days.
EMI schemes can be a powerful way of incentivising future success. From an employee perspective they are valuable and tax efficient and, for employers, they help to ensure that your people are aligned with the overall objectives of the business. If you have any questions about the changes to EMI schemes, please do get in touch with us at Clayton & Brewill – you can contact us here or call 0115 950 3044.