On 4 April, HMRC confirmed that State Aid approval for EMI (Enterprise Management Incentive) share options expired on 6 April and that although the government had applied for renewal this had not yet been granted.
HMRC provided guidance which stated that it was their view that the tax benefits of qualifying EMI share options would remain for those options granted on or before 6 April but there was a risk that any options granted after this date would be treated as unapproved options for tax purposes and so not be guaranteed the tax advantages associated with an EMI scheme.
The advice was not to grant EMI options until EU State Aid was back in place.
The good news is that this period of uncertainty was short lived and on 15 May the EU Commission announced that the EU State Aid was back in place and so EMI options will continue to attract the tax benefits.
EMI share options, when used in the right scenarios, are a good way for companies to attract, incentivise and retain key members of staff. EMI is an approved scheme and so has a number of tax benefits and for this reason it is only available to companies and employees who meet a number of conditions.
The main advantages of EMI share options are as follows:
EMI options can be granted to employees free of income tax and National Insurance. As long as the exercise price is set at the actual market value at the date of grant, employees will not suffer any Income Tax or National Insurance on any increase in value of the shares from the date of grant to the date of exercise.
As long as the option is held for at least 12 months, the gain on the disposal of shares acquired from the exercise of an EMI option may qualify for entrepreneurs’ relief. Capital gains tax would be applied to the increase in value from the date of grant to date of disposal.
This is compared to unapproved share options where the employees would face paying up to 45% income tax on the increase in value of the shares as at the date of exercise.
Companies can claim a corporation tax deduction equal to the gain realised by the option holder when the options are exercised (i.e. difference between the market value at the date of grant and the value at the date of exercise).
Using share options can make employees feel more aligned with the interests of shareholders and the board, with all parties working towards a profitable exit.
If you would like to discuss EMI options in further detail and whether your company could benefit from implementing such a scheme please contact us.