Originally written by Timothy Adler on Small Business
Small to medium-sized business owners know the importance of incentivising and retaining key employees using a share options scheme.
They’re both tax efficient for the company and the employees who benefit.
However, there are practical problems which mean that such schemes may not work. If this happens, the company and employees may find that the tax incentives which led them to implement the scheme are not available or that the scheme did not achieve its desired outcome.
Enterprise Management Incentive
The most common scheme is the Enterprise Management Incentive (EMI) scheme. Typically, once a young business becomes established, the company will offer key employees share options under the EMI scheme. Commonly, employees are only allowed to exercise the option when the company is sold and therefore receive the value without accruing any rights as shareholders. This allows the employees to participate in the sale at no direct cost to the company or its founders.
How the EMI works
Implemented properly, the scheme allows the employees to pay capital rather than income tax on the proceeds of sale of shares after exercising the option. Employees may also able to claim entrepreneur’s relief, which further reduces the capital tax payable. The