How it Works
EMI Schemes are HMRC tax-approved and allow a company to grant share options to selected employees, which means that they have the right to purchase these shares at an agreed price at some point in the future. A common way this is exercised is when the business is sold. The employee buys the shares at the agreed-upon price and sells them the same day, pocketing the difference. This provides a very tax-efficient incentive for employees.
Granting these options creates no immediate charge to the employee's income, so there is no initial tax liability. If the option price is at the market price of the shares at the point they were granted, there will be no tax to pay when the shares are purchased either – even if the market value at the time of exercise is higher. When the shares are sold, the employee would be subject to capital gains tax on the profit between the option price and the sale price. The costs of setting up and administering the EMI Scheme is an allowable expense of the business, attracting corporation tax relief.
While a great program, EMI Schemes have limits. The options granted cannot exceed a total value of £3m, and each employee's options cannot exceed £250,000. There are additional rules regarding which companies and employees are eligible for EMI schemes. Please contact us for more information.
Value the company at the point at which the share options are granted, as this determines the market value of the options. It also supports the validity of the scheme with HMRC.
First, we will complete the initial valuation of the company and then devise a share option scheme that is right for your business and key employees. We will then create the necessary option documentation. Note that whilst these schemes are usually straightforward and ideal for small businesses, you need to ensure that everything is done correctly to protect the business, and not land you or your employees with any unexpected tax liabilities.
An EMI Scheme includes the company valuation and all option documentation & agreements. The cost is much less than the recruitment fee company's pay if a key employee left, not to mention the disruption such a loss causes. Thus, it serves as a highly cost-effective retention tool, as you can include a provision that share options are only valid whilst that person is an employee.
Would you like to know more? If you'd like to chat to The Accountancy Cloud's EMI Scheme specialist, Christopher Lee, about whether an EMI Scheme is right for your business, please get in touch. We’re here to help.