Cash Free Rewards Option Closing
Time is running out for larger private firms to reward their staff in a cash free share options scheme, although if they act quickly they can still benefit – and the option for smaller firms will remain open.
The enterprise management incentive (EMI) scheme, which allows businesses to give staff tax efficient share options, will no longer be available after the Finance Act gains Royal Assent in July for companies employing over 250 full-time staff..
Sarah Anderson share schemes specialist at South West law firm Foot Anstey explains “With all the talk of a credit crunch, most companies are keeping a wary eye on expenditure and are looking for ways to stretch their money further.
“If you’re an employer, you still need to keep your employees motivated and rewarded. Luckily, there is a way of incentivising key employees, without having to dip into the coffers.
“EMI options are a tax-efficient way of granting options over shares in your company to certain employees. You don’t need to pay out any cash – but if your business is sold, your most important employees can share some of the financial success that they have worked for.”
“From July larger companies will no longer be able to offer these options but for those employing under 250 full-time staff EMI will still be available.
If companies act quickly, they may still just have time to grant options to their staff before the window closes. It is particularly worth while now because the value of shares over which options can be granted has just been increased from £100,000 to £120,000 for each key employee.
An EMI option gives the optionholder the opportunity to buy shares in the future at a price fixed today. So if an option is granted today at £1.00 per share, and the share’s value increases to £10, the optionholder can then buy a share worth £10 for only £1.00.
Usually, there will be income tax and National Insurance contributions to pay on the £9.00 difference. But the EMI rules mean there is usually no tax to pay when the option is exercised.
Tax will only be due when the shares are sold, at the new 18% flat rate for capital gains. Remember though the annual capital gains tax exemption of £9,600 means there could be no tax to pay at all.
Many companies can grant EMI options, as long as they are independent, under a certain size, and don’t carry out certain property and finance related trades. Advance clearance can be obtained from HMRC for comfort in this area.
Any employee who works at least 25 hours a week and doesn’t already own (together with his relatives) more than 30% of the company’s shares can receive EMI options.
Sarah Anderson adds “EMI options don’t give control away to employees. EMI optionholders don’t get shares until they exercise the options and the directors decide when this will be. For many private companies this will be when the business is sold – generally, EMI optionholders will then sell their shares along with the other shareholders.
“The cost of setting up EMI is tax deductible and there will usually be a corporation tax deduction on the exercise of the option, based broadly on the increased value of the shares.
“EMIs offer a real business opportunity for some companies.”
