How to explain the benefits of an EMI scheme to your employees
I am often asked by clients how they should present a share scheme to their employees in order to explain what is on offer and to ‘sell’ the opportunity to them. As such I have summarised briefly below how to answer some of the usual queries when explaining a share scheme to employees. I have focused here on EMI because this is the scheme most commonly used by SMEs.
What am I being offered?
You are being offered an option over shares, which is the right to buy shares at a pre-agreed price at an agreed point in the future. Your option agreement will outline the agreed price and the point at which you are able to convert your option into shares by ‘exercising’ it.
Why is it worthwhile for me?
If the company’s value increases over time, you could make a significant profit when you come to sell the shares. You will benefit from the growth and success of the company in the same way as the owners. The tax benefits of EMI mean that you’ll pay a lower rate of tax on your share sale compared to what you would have paid if you received cash bonuses.
What tax will I pay?
There will be no tax due on the grant of the option. There will be no tax due on the exercise of the option[1]. You will be liable for capital gains tax (“CGT”) when you sell the shares, and the taxable gain is calculated as the sale price, less the amount you paid for the shares. CGT rates are currently 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. If you the combined period for which you have held the option and the shares is more than two years at the point of sale, you may be entitled to Entrepreneurs Relief which gives a CGT rate of 10%, even for higher rate taxpayers if specific criteria are met.
Why am I being offered share options?
We have selected several key employees to be given share options: we aren’t offering this to everyone. We value your contribution to the business and want to reward your hard work by enabling you to share in the future success of the business.
To discuss EMI, other share schemes or wider tax matters please get in touch via LinkedIn or on [email protected].
[1] Provided the agreed share purchase price is no less than the market value when the option was granted.