How EMI Schemes work
Through the EMI scheme, the company offers selected employees the opportunity to invest in the company by buying shares. EMI is an HMRC approved scheme that allows companies to grant some employees the right to acquire shares at an agreed price at a given time in the future. One of the instances when the employees can exercise the right is at the selling point of the business. In such a case, the employee buys the company shares and sells them on the very day and pockets the difference between the agreed price and the final sale price in a tax-efficient manner.
Why is it tax efficient?
First, the employees get the grants without any tax liability meaning that there is no immediate income tax charge on the employee.
Secondly, if the agreed share price at the granting time is equivalent to the stock’s market price, the employee will pay no tax even if the market value is higher at the date of exercise. However, selling the shares at that point or another in future, the profits between the agreed price and the sale price would be subject to capital gains taxation.
Finally, the EMI Scheme setting up and administering cost is an allowable expense to the business. Hence it attracts corporation tax relief.
EMI Scheme Limits
Like any other scheme, EMI has its governing rules. Some rules define which companies are eligible for the scheme; others determine which employees are eligible while others set the limit of the amounts involved. Some of the financial limits set require that the total value of the options granted should not exceed £3m and options given to individual employees should not exceed £250,000. The rules are quite a number, and if you would like more information, please contact us.
At the time of granting the rights, the company is evaluated to determine the market value of the options at that point. HMRC also requires the company valuation to determine its eligibility for the scheme.
We can do the initial company valuation for you and formulate an options plan that fits your business and your key staffs. Then, with the help of a solicitor, we will draw up all the relevant documentation. To protect your business and employees from unexpected tax liabilities, you need to ensure that you do everything right, however straightforward it may look.
Depending on the complexity and the size of your business as well as the EMI Scheme you will choose, setting it up may cost you between £3,500 -6,000. The amount will cover all legal documentation and agreements plus the company valuation. The fee is far much less than what it would cost you if you lose a key employee. We have heard clients, who have been through the process, mention that the fee is invaluable compared to the disruption caused by the loss of a key employee.
By including a provision in the Scheme that implies that the share options expire when a person ceases to be an employee of that company, the plan provides a cost-effective way of retaining outstanding individuals in the business.