As many business owners will recognise, it is imperative to recruit, retain and motivate key employees to support growth and future success. Enterprise Management Incentive Option Schemes or EMI schemes are a type of HMRC recognised employee share scheme specifically targeted for use by small, privately owned companies. EMIs are popular because, unlike other share incentive schemes, they enjoy tax favourable treatment and do not need HMRC’s prior approval.
The life-cycle of an EMI can be roughly broken down into three stages: (1) the grant of the EMI option to the employee(s), (2) the exercise of the option by the employee(s) which converts the option into actual shares and (3) the subsequent sale of the shares.
Ordinarily, if a company gives shares (or options for shares) to an employee then income tax and NIC liabilities will arise on the grant and exercise of the option. These liabilities can be significant.
With a properly prepared EMI scheme however, the employee shouldn’t incur any tax liability on the grant or on exercise. On a disposal of the shares, capital gains tax will be payable on any increase in the value over the market value. If however entrepreneurs’ relief is available (which is often the case) this will mean an effective 10% rate of tax.