There are plenty of ways of measuring the success of a growing economy, but one very specific signal that things are on the up is the increased interest in Enterprise Management Incentive (EMI) options. Although they’ve been around for a few years now as a way of retaining and rewarding key staff, more and more businesses are starting to take notice. The bottom line is that EMI options are a tax-efficient way of granting shares to key employees. Critically, they qualify for Entrepreneur’s Relief under most circumstances, which means the capital value of any shares would only be taxed at 10% on the sale of a business.
Perhaps you’re an owner-manager of a business and thinking about the best way to incentivise a key member of staff? Although it’s always important to take professional advice from your accountant, here are some key facts that are worth bearing in mind.
First, the granting of options allows a level of protection for existing shareholders. The options will lapse if the beneficiary chooses to leave, which gives reassurance and reduces the burden on the business of costly shareholder disputes.
Another point to note is that trigger points or ‘conditions’ can be built into the arrangements. Usually the options can only be realised when the business has moved beyond certain profit thresholds. As a result, your employee is strongly motivated to help the company grow. And although current owners might lose some shareholding, they are compensated by the overall increase in value.
For Entrepreneur’s Relief to apply in normal circumstances, a director or employee must hold more than 5% of the voting share capital in a business for more than the 12 months preceding the sale of the shares. With EMI options, you can still qualify for relief with a lower percentage shareholding and the 12-month clock starts when the option is granted and not when it is exercised. It is therefore possible to exercise the option immediately prior to a sale and still benefit from Entrepreneur’s Relief. It’s a flexible system that gives you a lot of control, provided you are a business with fewer than 250 people and the options aren’t worth more than £250k at the date of grant.
A typical scenario might be an owner of a business who hopes for a trade sale in a few years and who has one or more employees that will be critical in growing the value of the company. The business owner can grant options which trigger when specific targets have been met. The staff member involved would then exercise the options prior to the sale. This either provides a share in the overall value on exit or provides an amount which the employee could use to support a management buy-out.
The agreement itself doesn’t necessarily need the involvement of lawyers and can often be handled by your accountants. So if you’re looking for a way to incentivise key staff members and grow your business, why not talk through the possibilities?
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk