The Enterprise Management Incentive regime was intended to allow commercial flexibility, and it does. There is no period which must elapse before the option is exercised, and no requirements as to the minimum exercise price or as to when the option must be exercised.
Relief from income tax and NICs is afforded to the whole, or part, of the gain in market value of the option shares realised upon the exercise of a share option granted by a qualifying company to an eligible employee. CGT is charged on any gain on sale of the option shares by reference to the exercise price paid (and any amount on which relief from income tax was not available at the time of exercise of the option). If all relevant conditions set out in the Corporation Tax Act 2009 are met, relief from corporation tax for the amount of gain realised upon exercise of an EMI option should also be available to the employer company. From 6 April 2013, shares acquired upon the exercise of an EMI option will also qualify for Entrepreneur’s Relief from CGT (a reduced rate of 10%) on disposal, regardless of the percentage of the ordinary share capital they represent, provided that disposal takes place at least 12 months after the grant of the option.
The combination of reliefs means that EMI share options are currently the most attractive mechanism for a small company seeking to enable key employees to benefit from growth in value in a tax-efficient manner. A company which qualifies to grant EMI options should always consider doing so before looking at any alternatives.
However, the relief is only given in respect of any gain representing growth in the market value of the option shares from the date of grant to the date of exercise or, if it occurs more than 40 (to be 90) days before the date of exercise, the occurrence of a “disqualifying event”. Any amount by which the exercise price is less than the market value of the option shares at the time of grant is charged to income tax at the time of exercise. For this reason, it is always desirable (although not strictly necessary) to determine and agree with HMRC Shares and Assets Valuation at or before the time of grant exactly what is the “market value” of a share in the EMI company as at the time of grant. Such a valuation agreement will also ensure that EMI options are granted within the individual and overall limits referred to below.
The company whose shares are put under option (“the plan company”) must be an independent company with gross assets of less than £30million and the plan company, or group, must have less than 250 employees (full-time equivalent). Any subsidiaries of which the EMI company has control must be 51% subsidiaries or, in the case of a property company, a 90% subsidiary. The activities of the EMI company, or group, must not consist as to a substantial part (20%) of non-qualifying activities. We can help you identify whether your company engages in any non-qualifying activities.
To be eligible to be granted an EMI option an individual must be a director or employee of the EMI company or of a qualifying subsidiary who is committed to spending at least 25 hours per week, or, if less, 75% of his or her working time to the business of the group and must not have, or be deemed to have at the time of grant (only), a “material interest” (30%) in the EMI company.
Limits on the grant of EMI options
There is an individual limit, of £250,000, on the aggregate initial unrestricted market value, as at the date(s) of grant, of the shares over which EMI options may be granted to an eligible employee (or director). The value of any shares over which CSOP options are held by the individual are counted towards this limit. There is also an overall limit of (currently) £3 million on the aggregate initial unrestricted market value of shares in a company over which unexercised EMI options may be held by all employees.
Nature of the option
The option must take the form of a written option. Exercise of the option may be performance-linked, but it must be capable of being exercised, if at all, within 10 years (and relief is not available if it is exercised after more than 10 years from grant) and must not be capable of exercise (by personal representatives) more than 12 months after the death of the optionholder .
Notification of grant to HMRC
It is vital that the grant of the option is notified to HMRC Small Companies Enterprise Centre within 92 days on the form available at Form EMI1 – Notification of grant of an EMI option, as it will not otherwise qualify as an EMI option.
The occurrence of a disqualifying event will curb the amount of gain on which tax relief is given as, unless the option is exercised within 40 (to be 90) days after the occurrence of such an event, any growth in value accruing after the event will not qualify for relief. Common “disqualifying events” include: a loss of independence of the company (save in the event of a takeover if the option is exchanged), the EMI company ceasing to meet the trading activities test or the optionholder ceasing to be an eligible employee.