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Enterprise Management Incentives

The Enterprise Management Incentive (EMI) is a discretionary share option scheme designed to help smaller and younger companies attract and retain talented employees.

Background

The EMI was introduced in the Finance Act 2000, alongside the Share Incentive Plan.

According to HMRC statistics, 9,820 UK companies operated EMIs in 2013–14, making it the most popular share scheme by some distance.

Summary

The Enterprise Management Incentive is a tax favoured plan aimed at younger and smaller companies who want to attract, reward, and retain skilled staff.

It allows companies with gross assets of less than £30 million and fewer than 250 full time (or equivalent) employees to grant options over shares up to a value of £250,000 per employee (valued at the date of grant). EMI does not require formal HMRC approval prior to implementation of the plan.

As long as the exercise price is set at the market value of the shares at the time the option is granted, there will be no Income Tax or national insurance contributions charge when the employee exercises the option (provided the exercise takes place within 10 years of the grant). Gains will be subject to CGT after using the employee’s annual exemption. Even better- the gains under an EMI now qualify for entrepreneurs’ relief as long as the option was granted more than 12 months prior to sale, meaning any capital gains will be paid at just ten percent.

  • EMI is an discretionary approved share scheme which has proved very popular with SMEs
  • It is designed to help smaller companies attract and retain key employees without offering huge salaries
  • Under an EMI the company grants options to selected employees to purchase shares at no less than the nominal value of the shares
  • The exercise time must be consistent with commercial or retention reasons
  • The increase in value from market value at date of grant to value at date of exercise is free of income tax as long as the underlying shares over which the option is granted does not exceed £250,000
  • The increase in value is instead subject to the Capital Gains Tax entrepreneurs’ relief rate as long as the options have been held for 12 months, meaning a rate of ten percent (otherwise 18% or 28%)
  • To qualify for EMI the company and employee must past a number of strict eligibility tests

Further reading