As business owners consider who will succeed them when they retire or focus on new projects; a key consideration is ensuring there are senior people in place who are aligned to business objectives and the company’s long term plans.
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Frazer Nicol, Tax Partner at Azets, discusses an HMRC approved employee incentive available to business leaders to develop and incentivise their senior team.
Enterprise Management Incentives
Enterprise Management Incentives (“EMI”) share options are a way of motivating and retaining key employees by offering options over shares in their employing company or group. Provided the awarding company meets the qualifying conditions, EMI can be one of the most tax efficient and flexible methods of providing equity to employees. However, if not given careful consideration and implemented correctly, issues can arise.
Whatever the overarching objectives may be, businesses need to be clear on why they are offering shares/share options; and that existing shareholders get sufficient value back for seeing their percentage interest in the business decrease.
EMI and succession planning
An owner might be looking to sell the business and having a strong and committed senior management team is critical in business valuation. EMI can align interests as employees will also benefit from a successful sale rather than seeing it as something unsettling or a risk to their position. In this situation, EMI can assist in ensuring key employees are committed to business objectives and maximising business value.
How EMI works?
Employees can acquire shares through the issue of qualifying share options.
In general terms, the options must be over shares in the employer company or in the parent company of the employer if there is a corporate group.
The options:
- can be over a new class or existing class of ordinary shares;
- can vest at any time as long as this is within 10 years of grant; and
- can be subject to individually tailored performance conditions (which could be as simple as continuity of employment).
No employee can have EMI options over shares with a market value of more than £250k and the company is limited to EMI options over shares worth a maximum of £3m. The full EMI conditions should be reviewed as part of the exercise to establish whether EMI options are the best alternative for a business.
Options will typically lapse on termination of employment in whole or in part.
Employer tax and cash benefits
- Use of EMI options does not carry the same cash outlay burden for employers as using bonuses;
- If implemented correctly, there should be no employer NICs payable in relation to the EMI options, unlike cash bonuses.
- On exercise of qualifying EMI options, there is usually a Corporation Tax Deduction available to the employer company. This deduction can often be utilised in negotiations with a third party buyer, to increase sale proceeds.
- Employees can often secure 10% Capital Gains Tax on gains realised through exercise of EMI options, under current tax rules.
If you have any questions in relation to succession planning or EMI schemes, contact Frazer Nicol, Tax Partner, by email frazer.nicol@azets.co.uk or call 01224 581 288 or visit Azets website.
