Employee Incentive Schemes

If options are being granted to a small number of employees, we recommend using a simple share option agreement, rather than adopting a formal scheme. This is a contract between each the company and employee to whom options are being granted.

EMI (Enterprise Management Incentive) options are tax-advantaged options which have significant tax benefits for the employer and the employee, provided that certain HMRC criteria are met. Any grant of EMI option must be notified to HMRC within 92 days of the grant date. EMI options may be granted either by the company or by an existing shareholder.

No. HMRC prescribes limits on those companies which may grant EMI options. These relate to the company’s gross assets (any company with gross assets of £30million or more cannot grant EMI options), and certain business activities (such as farming, property development and legal services) are excluded.

Employees who hold shares or options in their employer company (or group) are generally subject to income tax on the value of this benefit. If the relevant regulations are complied with, employees to whom EMI Options are granted will only pay CGT at the point of sale of the shares, and may then be entitled to Business Asset Disposal Relief.

Yes, provided that the employee’s contracted working hours for the Company are at least 25 hours per week or (if less) at least 75% of that employee’s total working time.

With “growth shares”, the shareholder will generally only benefit from growth in value of the company accruing after their shares are allocated to them. Alternatively, shares can be designed so that the shareholder benefits from growth above a stipulated company value (“hurdle shares”), or only if a financial condition (e.g. a minimum profit target or exit condition) is met (“flowering shares”).

A phantom share is a cash-based incentive for employees, providing a cash payment linked either to an increase in value of the Company or the achievement of a financial performance target. Phantom share arrangements avoid increasing the number of shareholders or diluting the shareholdings of existing shareholders. Phantom options are treated like cash bonuses for tax purposes.

Yes – employees can be granted “exit-only” options, which means that their option price is fixed at the date of grant, but they do not receive (or pay for) their shares until the company is sold. At that point, the employees receive the sale price for their shares less the option price payable. Alternatively, a phantom share plan could be used.