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Could budget changes mean now is the time to implement an EMI Scheme...?

Napthens - May 11th 2012

An EMI scheme is a type of share option scheme that has been designed to give smaller companies the opportunity to design share option arrangements that meet their specific needs. These have several commercial advantages for a business including enabling key employees to be motivated and rewarded in a cost effective manner. The 2012 budget has made a number of changes to make the use of EMI Share Option Schemes even more attractive.

A typical commercial use of an EMI Share Option Scheme is to grant a key employee a share option, which is the right to acquire shares in their employing company (or the parent company if they are employed by a subsidiary) on the happening of certain events (commonly the sale of the company or the meeting of performance targets).

If structured correctly, the individual employee will not have to pay income tax on either the grant or the exercise of the Option, making it very tax effective. The employee may have to pay capital gains tax (“CGT”) on the sale of the shares but the CGT rates are less than the income tax rates. One of the budget changes enables EMI Share Options to potentially benefit from a CGT relief known as Entrepreneurs Relief. This has the effect of potentially reducing the CGT rate further, thus making the EMI Share Option Scheme even more attractive. Entrepreneurs Relief enables the tax rate on a capital gain to be reduced from either 18% or 28% to just 10%, provided the qualifying conditions are met. Previously it was difficult for holders of EMI Share Option Schemes to benefit from this relief.

From the employer's perspective, the EMI Share Option Scheme can operate as a cost effective “golden handcuff” arrangement, by offering the employee a benefit that helps them to be retained. The EMI Share Option Scheme provides the employee with an advantage that cannot be immediately quantified but which may be very valuable. Having this benefit may dissuade the employee from leaving for a competitor, if say they were offered a salary increase. As an alternative, an EMI Share Option Scheme could be offered to an employee instead of a pay rise, thus helping a company with cash flow concerns retain key staff members. In addition, the company can obtain corporation tax relief when the options are exercised, making the arrangement very tax efficient for the company.

The budget changes have made EMI Share Option Schemes even more attractive not only by enabling the Options to benefit from Entrepreneurs Relief but also by more than doubling the value of the shares that can be under option from £120,000 to £250,000. The increase of the value of the shares that are under Option means that it is possible to substantially increase the economic benefit of the EMI Share Option Scheme.