2020 will undeniably be a memorable year. The UK forced into lockdown by Covid-19, which has resulted in many businesses going bust and or feeling the financial strain. We have been informed that the UK has now entered into a recession for the first time in over 10 years. There is no doubt that there will be tough times ahead and businesses will be relying on employees to pull together to come out of the other side. If companies are to rely on their employees, it is vital that they retain and attract the right people. One way companies can achieve this whilst protecting cash at the bank is a share scheme.
Share schemes are known for attracting and motivating staff without losing precious cash in the company. It provides the employee with a sense of ownership and inclusion.
The most common employee share scheme is the Enterprise Management Incentive (EMI) share option scheme which is designed for small and medium-sized companies. Under this scheme, a company can select employees and give them the option of acquiring shares over a prescribed period, subject to qualifying conditions being met. The financial benefit of the employee receiving the option is a follows:
- No tax is charged on the exercise (this is when you’re actually issued the shares in the company) of the EMI option (provided it was granted at market value);
- If the Company’s share price has increased in value between the time of the grant and exercise, the uplift is not subject to income tax; and
- There will be Capital Gains Tax (CGT) charge (at lower rate) when the employee disposes of their shares and the proceeds exceed the market value at the date of the grant of the options.
This checklist sets out the main questions that a company should ask in order to determine whether they can grant EMI options over the company, to a particular individual. These requirements must be met every time EMI options are granted.
Checklist for the EMI Company
- EMI options can only be granted over shares of the parent company of the group.
- The Company who is giving EMI options must hold the majority of shares in any subsidiary (more than 50%).
- If there is a property management company within the group it must be a 90% subsidiary.
- The EMI company must satisfy the trading requirement, which means that the group must not carry out an excluded activity which amounts to more than 20% of the business of the group. An example of an excluded activity is investing in shares.
- The EMI company or its group must have a permanent UK establishment.
- The EMI company’s articles of association must contain no provision by virtue of which the EMI company could cease to be independent. This means that the shares cannot be redeemed by the company at a later date.
- The EMI company’s gross assets must not exceed £30 million.
- The EMI company’s group must have fewer than 250 full-time employees.
Checklist for the Shares
- The shares must be fully paid ordinary shares, which carry no future right of redemption. In other words, the company would not be able to buy back its own shares at a fixed price.
Checklist for the Options
- Options must be capable of being exercised within 10 years of grant.
- The option terms must be set out in a written agreement between the company and the option holder.
- The option must not be assignable.
- The option must not be exercisable more than 12 months after the option holder’s death.
Checklist for the option holder
- The option holder must be an employee of the EMI company or a qualifying subsidiary. Executive directors may qualify, however non-executive directors are not employees and they cannot qualify to receive EMI options.
- The option holder must spend at least 25 hours a week, or if less, 75% of working time, on the business of the company or group.
- The option holder (and associates) must not have a ownership of, or the means to control, more than 30% of the ordinary share capital of the EMI company. Shares under non-EMI options count towards the calculation, however, shares held under EMI options do not count until the EMI options are exercised and the shares are acquired.
Stephenson Law specialises in employee share schemes from establishment through to administration and if you would like to discuss a new or existing share plan, please do not hesitate to get in touch.
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