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Voyage of the star ship Enterprise

And so on this voyage of discovery through the wonderful world of share option schemes we arrive at the most recently discovered island in the archipelago – the Enterprise Management Incentives scheme.

That some of you may be confused by the range of share option schemes on offer is hardly surprising. This latest version looks set to take over from the approved share option schemes that we have known (and maybe even loved) to date.

The EMI scheme has certain similarities to an approved share option scheme that was available prior to July 17, 1995. The new EMI scheme provides for a number of novel and attractive features:

It can be exercised at any time within 10 years of being granted.

There is no minimum period of time for which the option must be held before being exercised.

There is no minimum period of time required between the exercise of qualifying share options.

Options need not be granted at market value and, indeed, can be granted at nil value if desired although an income tax charge will arise on the discount element when it is exercised.

When EMI shares are sold, for the purposes of calculating taper relief for capital gains tax purposes, the period of ownership starts from the date the share options were granted rather than the date when the share options are exercised.

Now that business assets taper relief has been extended in most circumstances to shares owned by an employee, this means that an employee paying income tax at the higher rate could exercise a share option after four years and any gain would be subject to capital gains tax at an effective rate of 10 per cent.

The EMI scheme provides for income tax relief where qualifying options are granted by a qualifying company to an eligible employee. The EMI scheme is designed to be flexible with few administrative requirements. There is no requirement for a trust-based-type scheme to be established which requires the prior approval of the Inland Revenue.

Accordingly, unlike with the other share option schemes, the Inland Revenue does not intend to publish any model scheme rules for the EMI. It has, however, posted a list of frequently asked questions on its web site, as well as a specimen notice required under the scheme.

For an option to be a qualifying option, notice must be given to the Inland Revenue within 92 days (increased from 30 days in the Finance Bill 2001) after the grant of the option together with such information as the Inland Revenue may require to decide whether the EMI conditions are being met.

A qualifying option is one which is issued for a qualifying purpose and is within the maximum entitlement of the employee. An option only qualifies if it is granted for commercial reasons in order to recruit or retain an employee and not as part of a scheme or arrangement where the main purpose, or one of the main purposes, is to avoid tax.

An employee cannot hold unexercised options with a total value of more than £100,000. Where there is an excess, the excess is not a qualifying option. For these purposes, unexercised shares in a company share option plan are treated as unexercised qualifying options. The value of the shares is their market value at the time the option is granted and, for these purposes, the market value of any shares subject to restrictions or forfeiture is determined without taking account of such risks or restrictions.

Originally, not more than 15 employees could hold qualifying options in respect of shares in the company at the same time. However, in Finance Bill 2001, the limit on the number of employees participating in the EMI has been abolished.

It was also proposed that the maximum limit on the total value of shares under the EMI scheme in respect of which unexercised qualifying options exist should be raised from the original £1.5m to £3m.

Next week, I will continue to look at the conditions for EMIs and the tests that a qualifying company must meet.

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