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Gareth Burton

Posted by Gareth Burton

Aug 18

EMI share options for staff

Burton Beavan | EMI share options for staff

 

EMI share options for staff – the Burton Beavan information sheet. The Enterprise Management Incentive (EMI) scheme was launched by government as a way for firms to:

  • incentivise their staff to remain with them, and
  • allow them to share in the benefits of accelerated growth and a later sale, investment round or flotation.

It’s the British version of the type of employee share ownership scheme you may have heard about for the longest-serving staff at companies like Facebook and Google.

What do you need to know about EMI?

EMI share options for staff – is my business eligible?

To qualify for the scheme, your firm must not be part of a larger entity. You must have fewer than 250 employees, gross assets of £30m or less and your trade must not be in:

  • land investments,
  • share investments,
  • financial services,
  • the leasing of assets,
  • the receipt of royalties or licence fees,
  • legal services,
  • accountancy,
  • property development,
  • forestry or
  • farming.

EMI share options for staff – what can I offer to staff members?

Share options can be offered to staff members who work either 25 hours a week on average or for at least 75% of your employee’s working time.

Over a 3-year period, you’re allowed to grant share options to the value of £250,000 per staff member.

What is a share option? It’s the right to purchase a share at a given price. Let’s say that your business is valued at £500,000 and you want to give an employee share options to the value of £10,000.

Over the next five years, your company enjoys impressive growth and has now been valued at £5,000,000 – 10 times the amount you were worth when you granted the share options. Even though those shares are now worth £100,000, your employee can still purchase them for £10,000.

The shares under option must be part of the standard ordinary share capital of your company. Each share must be fully paid-up and non-redeemable.

Important – at any given time, there must be no more than £3m of unexercised EMI options. “Unexercised” means that a participant in the scheme must have not bought the actual shares at the price the share option permits.

EMI share options for staff – who decides what a company is worth?

Ultimately, HMRC will always have their own opinion on what your company was worth when the share options were granted originally and what your company is worth now.

At time of offering share grants, ask the Burton Beavan team for an independent valuation. There are multiple different ways to value a company but rest assured that when we finally fix a price, the justification behind that valuation will be explained in depth to HMRC when we’re applying to launch your company scheme.

If your company has been through one or more investment round lately, or you have recently received an offer to purchase your business, these are considered solid and reliable ways to put a monetary value on your firm’s share capital.

EMI share options for staff – what tax will my staff member be liable for when they exercise their share option?

That all depends on the EMI option you gave your staff member. In this article, we’ll look at two examples – one where you gave away the share option at no cost and one where you grant the share option at market value.

For the first example, let’s say you gave away £50,000 worth of share options free to an employee. You sell your company and those £50,000 of shares are now worth £100,000.

If your staff member was a higher tax payer, they would pay 40% tax and 2% National Insurance on the £100,000 (£40,000 tax plus £2,000 NICs). They would pay Capital Gains Tax with entrepreneurial relief at 10% of the £50,000 profit (£5,000). After these deductions, your staff member would be left with £53,000 in cash. (You will also have to pay 13.8% Employers’ NIC on the sale).

On the other hand, let’s say you offer an option of £50,000 in shares to your employer and, as before, their value has risen to £100,000 when you come to sell your firm.

£100,000 proceeds minus £50,000 share option equals £50,000 profit. Entrepreneurs’ CGT will be charged at 10% meaning that your employee must pay £5,000 (10% of £50,000) to HMRC.

The remaining £45,000 is the profit on the transaction which is not subject to income tax or NI and this is the cash your staff member would be left with.

EMI share options for staff – setting one up for your company

The process for establishing an EMI for your business is complicated and we strongly advice all clients to work with us to make sure that all of HMRC’s procedures have been followed and that all documentation thereafter is in order.

Call the team on 01606 333 900 or email us at hello@burtonbeavan.co.uk and let’s talk about the pros and cons of EMI for your company.

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