Incentivising your employees – benefits to using an EMI scheme
Are you thinking about incentivising your employees or and you reading this and asking why would I want to?
I have found that Enterprise Management Incentive (EMI) schemes are very popular among private firms. They are used to encourage key employees to remain with the company, to reward them for their performance and to encourage and to inspire the employees to think commercially about increasing the value of the company as they are now entitled to a slice of the action on sale.
Some employers are reluctant to use share schemes as they may not want to give shares to all their employees. Unlike other share schemes, with the EMI scheme you can be selective with who you wish to include. EMI schemes work by the employer granting an employee the option to buy shares in the company. At a future date, within 10 years, the options are exercised and the employee now owns the shares. In a lot of cases this is structured so that the options are exercised in the future when the company is going to be sold.
Furthermore, the tax advantages associated with EMI schemes are particularly beneficial to the employees. With an EMI scheme, the value of the shares is agreed with HMRC at the date the options are granted. There is no income tax charge at the date the options are granted and if the options are granted at market value (MV) there is no income tax charge at date of exercise either. This can be very beneficial where the company has increased in value between grant and exercise of the options.
When the shares are sold capital gains tax (CGT) will be calculated based on the difference between MV at sale and the price paid by the employees. Where the shares are EMI shares and the relevant conditions are met the shares may qualify for Entrepreneurs Relief (ER) and thus any taxable gains would be subject to CGT at 10%. If the shares don’t qualify for ER, CGT would be payable at 20% for higher rate tax payers.
There is a lot to consider before pulling the trigger on this and I would encourage any employer thinking about going down this route to get in touch with any questions. At French Duncan we have great experience in helping our clients through this full process from start to finish.