Do you know the disqualifying events of Enterprise Management Incentives?
While enterprise management incentive (EMI) share option schemes are a tax-efficient means of rewarding and incentivising key employees, disqualifying events can be triggered by the company or the employee option holder. Disqualifying events occurring after the EMI scheme has been set up can cause the tax advantages to be lost.
Disqualifying events triggered by the relevant company, ie the company whose shares are under option, include:
- the company (or group) ceasing to meet the trading activities requirement;
- the relevant company becoming a 51% subsidiary of another company and ceasing to meet the independence requirement;
- alterations to the share capital of the relevant company affecting the value of the shares under option.
Disqualifying events triggered by the employee include:
- ceasing to meet the minimum working time requirement of 25 hours a week (or 75% of working time, if part-time);
- varying the terms of the option if the changes are more than de minimis.
Impact of disqualifying event
An employee has 90 days from the date of a disqualifying event to exercise their EMI option (if permitted under the terms of their option) to preserve the tax benefits. If the EMI options are not exercised within 90 days of the disqualifying event, the exercise will trigger an income tax on the increase in market value of the shares between exercise and date of the disqualifying event.
Companies with an EMI option scheme should be aware of the potential disqualifying event triggers and their impact to avoid inadvertently causing unexpected tax consequences for their employees.
Help from the experts
If you would like to discuss how disqualifying events may impact your existing Enterprise Management Incentives share scheme, please get in touch with our equity incentive team.
