Enterprise Management Incentives
David Dees, corporate partner in Heald Solicitors, says he often gets asked about how business owners can incentivise valuable employees and even pass on ownership to them.
One answer is enterprise management incentive options usually referred to as EMI options. An EMI option allows an employee to obtain shares in the employing company on beneficial terms. Provided the EMI option has been set up with the aim of incentivising and retaining an employee and not as part of a scheme for the avoidance of tax then no income tax or NIC will be chargeable on the exercise of the options.
The usual practice is to agree the valuation of the employing company with HMRC in order to establish the market price of the company at the time the options are granted. When the option is exercised by the employee then no tax is payable. One of the biggest benefits is that an employee can later benefit from entrepreneur’s relief if the company is sold even if he doesn’t satisfy the personal company test because he has less than 5% of the company. As long as the employee has held the option for at least 2 years at the date of exercise of the option then he will qualify for ER.
EMI options are very flexible for example you can:
- make them exercisable just before the company is sold;
- make them conditional on performance targets;
- set minimum holding periods; and
- make them lapse when the employee ceases to be employed.