Enterprise Management Incentives (EMI)
For small and medium-sized enterprises (SMEs), the most popular of the tax advantaged arrangements is EMI options. These are available to most trading companies or groups of companies with gross assets of not more than £30 million and less than 250 full-time equivalent employees. Some trading activities, such as banking and property development, prevent a company from participating. The maximum value of all unexercised options per company/group cannot exceed £3 million and the maximum value of unexercised options held by an individual cannot exceed £250,000.
There is no tax charge when the option is issued or, provided the exercise price is not less than market value at the date of issue, when exercised. If the option is granted at least a year before the shares are sold, the employee should be able to claim Entrepreneurs’ Relief on the capital gain on sale. This means a tax rate of 10% of the gain (after deducting the CGT annual exemption) which compares very favourably with income tax rates, and no NIC is payable. In addition, on exercise of an EMI option, the employer may be able to claim a corporation tax deduction of an amount equal to the market value of the shares less the amount paid for them.
A concern often raised by SMEs is the issue of dealing with small minority shareholdings. This can be avoided by making the options exercisable only on a sale of the company, while performance targets can also be included as a condition of exercise.