Woman hands cutting manna pie. Business diagram concept

Enterprise Management Incentive or Employee Ownership are 2 profit sharing schemes that can drastically improve Employee morale in the workplace.

EMI/Enterprise Management Incentive – this is the most popular tax advantaged share option plan. Employees are granted an option over a specific number of shares in the company at a set price.

EO/Employee Ownership – where a business is owned wholly or in part by its employees. The most common arrangement is where the employees are the beneficiaries of a trust.

Why bother with Employee Ownership or Enterprise management Incentive?

Both:

  • can help with succession. A founder might wish to retire or move on and the common exit strategies such as a trade sale or private equity or a management buyout may not be suitable;
  • can lead to increased productivity as employees with “skin in the game” tend to be more motivated
  • can assist with recruitment and retention of employees
  • are very tax efficient if correctly implemented.

How tax efficient exactly?

If 50% or more of a company’s shares are owned through a qualifying EO Trust (EOT) then provided the various other criteria are met:

  • the shares sold by the founder to an EOT will not attract capital gains tax for the selling shareholders – there is no cap on this amount; and
  • the employees can receive a tax-free profit share each year of up to £3,600.

There is no income tax or National Insurance contributions on the grant or the exercise of the enterprise management Incentive option provided that the exercise price paid by the employee is at least equal to the value of the shares when the option was granted. Business Asset Disposal Relief can be available on sale providing certain criteria are met so an employee may only pay capital gains tax at a special 10% rate.

Can a company be employee owned with an EMI scheme?

Yes! If there is an EMI scheme in place before an EO transition then the transition can be an exercise event. Further, an EMI scheme can be put in place in anticipation of an EO transition to retain and motivate key employees (and this might assist a founder’s chances of being paid any deferred consideration by the EOT).

 

If you have any further questions regarding EO or EMI, feel free to contact our Corporate Team.