Enterprise management incentives share options (“EMI Options”) are a discretionary award that carry tax-advantageous benefits.  Targeted specifically for trading companies that are seeking to grow, EMI Options are a tax efficient way to incentivise and retain staff.  For context, national statistics provided by the UK Government state that a total of 14,310 UK companies had live EMI Options in the tax year to 2021 which demonstrates how well-used these schemes are compared to other tax-advantaged schemes that are available.

EMI Options are governed by specific tax legislation and so the grant of these options need to be carefully considered to mitigate the risk of these options later not qualifying as EMI Options under the rules, a summary of these requirements (but not exhaustive) are as follows:

Shares and limits

The shares under option must be fully paid up, ordinary share capital.  EMI Options can be satisfied by a fresh issue of shares following exercise or the transfer from an existing shareholder (for example a founder or an employee benefit trust).  There are limits on the market value of shares that can be acquired by an employee, being £250,000.  The company is able to grant EMI Options up to £3,000,000 worth of shares.  The shares themselves can be subject to restrictions (for example mandatory transfer provisions when an employee becomes a “leaver”).

Company

The company must be a trading company/parent of a trading company that is “independent” of other companies, it must only have qualifying subsidiaries and the company cannot have gross assets exceeding £30m at the time of grant and more than 250 full-time employees.  We should note that there are certain trading activities that mean a company will not qualify to grant EMI Options.

Employees

The employees must be employed by the company or a group company (so non-executive directors/consultants will not qualify).  They must work for the company or a group company for at least 25 hours per week/75% of their working time.  An employee that has a “material interest” (i.e. beneficial ownership of more than 30% of the share capital prior to the grant of options) cannot be granted EMI Options.

Key aspects

• It is appropriate to agree a valuation with HMRC as to the market value of the shares before the grant of options.  As part of this valuation process, HMRC may agree to a discount for the shares on the grounds that the employee pool represents a minority interest and that the shares carry restrictions (if that is the case). 

• There should be no income tax or national insurance contributions for employee/employer on grant of options if the exercise price is no less than the market value of the shares when the options were originally granted. 

• The Company may qualify for corporation tax relief in respect of the gain(s) realised by the employee(s) on the exercise of options.

• Shares acquired by exercising an EMI option will be subject to capital gains tax (“CGT”) when they are subsequently sold.

• While EMI Options can be exercisable at any point during the ten years from the date of grant (for example to include vesting/performance criteria), they can be structured as “Exit only” options.  This means that the option holders will not acquire any shares initially, but will exercise their option and acquire their shares immediately prior to completion of a sale/exit event and they will sell their newly acquired shares simultaneously with the existing shareholders.

• Where an option is “Exit only”, HMRC have recently issued further guidance that restricts the ability of directors using their discretion to allow an option holder to exercise their options before an exit.  In short, this means that if such a discretion is used and an earlier exercise allowed, the EMI status of the scheme could be compromised and the option holders would be subject to a different tax regime.

• However, when we put the options in place, to provide maximum flexibility, we also added a provision that allowed the directors to use their discretion to allow the option holder to exercise the Options before an exit if the board thought it would be appropriate to do so.

• Shares that are acquired by employees following the exercise of an EMI option may qualify for business asset disposal relief (“BADR”) which could operate to reduce the effect rate of CGT to 10% (current rate), but is subject to the availability of the relief and the relevant employee’s own personal tax position.  Typically to qualify for BADR an employee must hold 5% of the share capital (voting rights, dividend and capital rights) but under EMI, BADR may apply even if the employee holds less than the required 5% so long as they have held the options/shares for at least two years prior to any sale.

• EMI status can be lost if a “disqualifying event” occurs, which includes the employee ceasing to be eligible, a variation in the terms of the EMI Option or the company becoming “controlled” by another company.  

Documentation and administration

It is a requirement of the legislation that the EMI Options are in a written agreement that details key provisions such as:

• (i) the grant date
• (ii) the number of shares under option
• (iii) the exercise price
• (iv) the manner in which the options may be exercised; and
• (v) detailing that the option is exercisable within 10 years. 

The employee should be carefully informed of any restrictions that apply to the shares that they are to acquire.

The grant of EMI Options must be reported using HMRC’s submission system within 92 days of grant and there are ongoing annual returns that must be filed each year thereafter.

Contact us

Moorcrofts regularly acts for companies and individuals across a broad range of industry sectors. With a wide array of clients, from PLCs and household names to sole traders and partnerships, Moorcrofts has the expertise to advise on all aspects of corporate law including the grant of EMI share options. For more information about Moorcrofts corporate services, visit our corporate services page or contact a member of the corporate team.