How EMI Share Option Schemes can work for you

Transcription

1 How EMI Share Option Schemes can work for you Paul Feist, Managing Director

2 What are EMI schemes? The EMI is a tax advantaged share option scheme which is designed for smaller companies whereby a company may grant options to selected employees to allow them to acquire its shares over a prescribed period. Provided certain qualifying conditions are met, there are a number of tax advantages that are available to the employee and employer EMI share options allow employers to attract and incentivise key individuals, encourage long term retention of staff, link share option awards to company performance and reward employees in a tax efficient way Employees can become shareholders by acquiring shares at a price and date specified by the employer A maximum of 250,000 of share options can be offered to an employee without incurring tax or national insurance charges

3 Which companies can qualify? Companies with gross assets of 30m or less Have fewer than 250 employees Companies that are not involved in banking, farming, dealing in shares or land, property development, legal and accountancy services, leasing, ship building, residential care or nursing homes

4 Which employees can qualify? Qualifying employees are those who work full time (defined as at least 25 hours per week or for at least 75% of their paid working time) Do not hold more than 30% of the company s shares (including any shares which are held by their associates)

5 How does it work? Grant, exercise, sale! The company decides how many shares it will offer to selected employees and the dates on which the options can be exercised An option is created and the value of the shares at that time is agreed with HMRC On the prescribed dates, the employee can exercise the option and acquire the shares at the price that applied when the options were granted And finally, the shares are sold at a (huge) profit!

6 What are the tax benefits? There is no tax charge when the option is granted There is no tax charge on the exercise of the share option (ie when the employee pays for the shares at the agreed price) On the sale of the shares, there may be a capital gains tax charge but provided the option has existed for 12 months or more, then the shares qualify for Entrepreneurs Relief (10% tax charge) The costs of setting up an EMI share option scheme are tax deductible for the company

7 What are the tax benefits? Cont d Corporation tax relief is available to the company on the difference between the option price which is paid for the shares and the market value of the shares on the date of exercise (new shares only)

8 Enteprise Management Incentive Schemes Example: The directors in a growing software company decide to grant options of 5% of the company s shares to each of two key employees which have an agreed value with HMRC of 5,000. Exercising the options will only be allowed upon sale of the company. 3 years later the company is sold for 10m, which means that the two key employees exercise their options at a cost to them of 5,000 and receive 500,000 each. This is taxed as a capital gain of 495,000 and after the annual exemption is liable to 10% tax amounting to 48,390 tax each.

9 If the share options were not granted under the EMI scheme the whole 495,000 would be subject to Income Tax and possibly National Insurance contributions, which could lead to a tax bill of up to 222,750.

10 Increasing Employee Engagement & Motivation The tax advisory team at Plus Accounting are available to discuss the options available to you. If you would like more information, please contact us on; Thank you for listening

11

12 Option Agreement Specifies option price agreed with HMRC Confirms number of option shares States when the option can be exercised States when the option will lapse If employment ends Tax advantage ends after 10 years

13 Entitlement to Option shares Phased accrual of entitlement to option shares? Pre-conditions Employee performance Company performance

14 Exercise of Option Exit only Potential for tension towards end of 10 year period Pre-Exit Employee will become a shareholder Articles of Association to provide for acquisition of shares if employee leaves? Phase exercise of options in tranches?

15 Other key points; The Company granting the options must not be a subsidiary of another company: if it becomes a subsidiary- on an Exit, the options should be exercised on a re-structuring, the options can usually be rolled over (subject to HMRC agreeing) At the outset and throughout the option period, the option holder must meet the EMI working time requirement i.e. must work for the company for at least 25 hours each week or, if less, at least 75% of the option holder s total working time.

16 Other key points; Option shares can be in a separate share class, but take care over any subsequent change in rights attached to any shares (including removal of any restriction attached to the option shares) The terms of the option should not be changed without professional advice

17 Visit our website; You can also reach us through our social media channels : Twitter@GSFWSolicitors YouTube Channel Linkedin Google+ Tim Smith: t.smith@gsfwsolicitors.co.uk ( ) Robert Hutchins: r.hutchins@gsfwsolicitors.co.uk

18 Modern Practice. Traditional Values.