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EMI Share Option Schemes

'Enterprise Management Incentive'

Employee Management Incentive (EMI) Share Option Schemes allow staff to acquire shares within their employing company in the future at a price set today and give considerable tax benefits to both the staff and the employer when compared to other types of share scheme. Legal Clarity can help you discover whether your company is able to grant EMI options and if so whether this is the right approach for your business.

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What are EMI share options?

A share option is a right to acquire shares in the future at a price fixed today. An EMI option is simply the most tax efficient way for an employee to obtain shares in the company or group for which they work without the employee having any upfront costs or any risks. At £250,000 the maximum value of shares over which an option can be granted under an EMI scheme is also the most generous amount of any available tax advantaged scheme.

There is no charge to tax when an EMI option is granted. In addition, as long as the statutory requirements are satisfied and the option price is set at market value, there are no tax or National Insurance Contributions for employees or employers and usually no income tax due when the option is exercised. The company may also benefit from a corporation tax deduction equal to the value of the shares being acquired. Finally, employees also often benefit from a reduced rate of capital gains tax if the shares are sold at a profit.

As you would expect for such a favourable arrangement a number of conditions must be satisfied for an option to qualify as an EMI option. Some of the key ones are that: 
  • The company issuing the options is an independent company or the holding company of a trading group, has 250 or fewer full time equivalent employees and gross assets of less than £30 million; and
  • Each person granted an option either works at least 25 hours per week or spends at least 75% of their working time working for the business. 

EMI Share Options

From £1,800+VAT

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How do EMI share options work and what kind of incentive are they?

Employees who are offered EMI options won’t directly own shares until the option is exercised.  EMI options are flexible and the scheme rules for each option scheme set out the framework. When each option is exercised will depend on the terms of the individual option agreement. So, for example, one employee may have to wait several years before an option is exercised, whilst another may be able to exercise their option within a few months or only if a particular performance target is met. 

Some EMI options are 'exit only' meaning that they can only be exercised if there is:

  • A sale of company shares resulting in a change of control;
  • A sale of the business and assets; or 
  • A flotation with the company’s shares being listed on a stock market. 

This means that the employee will only become a shareholder for a moment in time immediately before the exit, so there is no need to think about the voting or dividend rights attached to those shares. 

However, in other cases, such as where the company wants the employee to become a shareholder in order to benefit from dividends on the shares, Employers will want to consider the following:

  • Whether a new class of shares should be created over which options are then granted?
  • What should happen if an employee leaves the business? Should they be allowed to keep or be required to sell the shares they own, and if they sell, what price should they receive?
  • Whether a shareholder’s agreement is needed and if the existing articles of association are fit for purpose if there’s a possibility of an employee becoming a shareholder?  

What terms must be included in an EMI Option Agreement or Scheme?

  • The date of grant.
  • That the option is granted under the EMI legislation.
  • The number or maximum number of shares over which the option is granted.
  • The price (if any) that the employee must pay on the exercise of the option or a mechanism for determining the price.
  • When and how the option can be exercised.
  • Any performance or other conditions that must be met by the employee.
  • Any restrictions on the shares, such as a risk of forfeiture.

Advantages of an EMI Share Options Scheme

EMI share options can have a range of benefits, such as:

  • They align the interests of the employees and shareholders.
  • There’s no complication of creating a minority interest or voting conflicts if the option is only exercisable on an exit.
  • There’s no tax costs on grant, and no risk for the employee as they so not have any upfront costs, and can choose whether and when to exercise the option. 
  • The tax regime for EMI options is the most favourable of all those currently available.
  • They’re flexible and relatively simple to set up and administer.



FAQs

1. EMI Share Option Guide

Qualifying Conditions

There are a number of conditions that must be satisfied for an option to qualify as an EMI option including the following:

Commercial Reasons
The option must be granted for commercial reasons to recruit and retain employees and not as part of a scheme to avoid tax.

Independence
The option shares must be in an independent company with gross assets (including the gross assets of any subsidiaries) not exceeding £30 million.

Trading Companies
The company must carry on a trade wholly or mainly in the UK on a commercial, profit-making basis which does not, to a substantial extent, include various excluded trading activities or be the holding company of a trading group where at least one company carries on such a trade.

Maximum Employees
The company must have fewer than 250 full time equivalent employees.

Options over Ordinary Shares
The option shares must be fully paid up and form part of the ordinary share capital of the company. However it is possible to create a class of shares with specific rights for use in the arrangement.

Non- Redeemable Shares
The shares over which options are granted must not be redeemable.

Employee Working Hours
The employees to whom the options are granted must work at least 25 hours per week for the company or, if less, at least 75% of their working time.

Non-Material Interest in the Company
Employees to whom the options are granted must not have a material interest of 30% or more in the ordinary share capital of the company either on their own or together with persons connected with them.

Maximum Value per Employee
No employee can hold qualifying EMI options over shares with a value exceeding £250,000 as at the date of grant. If the employee has any tax advantaged Company Share Option Plan (CSOP) options those also count towards this limit.

Exercised within 10 years
A qualifying EMI option must be capable of being exercised prior to the tenth anniversary of the date it is granted. If the option is in fact exercised ten or more years after grant its tax advantaged status is lost and the option is treated as unapproved for tax purposes.

Maximum Total Value
The total value of shares in the company over which unexercised EMI options exist cannot exceed £3 million.

Option Agreement
The option must be granted under a written agreement between grantor (normally the company or an employee’s trust) and the employee usually, but not necessarily, pursuant to a share option scheme.

Notify HMRC
The grant of an option must be notified to HMRC online within 92 days of the date of grant. An option can only be notified if the company granting the option has registered the arrangement with HMRC and obtained an HMRC reference number. An annual online return must be submitted to HMRC by 6 July each year confirming all option grants and exercises in the tax year just ended.

Companies may submit details of the company to HMRC Small Company Enterprise Centre (SCEC) for advance assurance on whether the company will be a qualifying company for the purposes of the EMI legislation. The SCEC is not obliged to give advance assurance in respect any other requirements of the EMI legislation.

Valuation

Although there is no legislative requirement to do so, it is advisable for a company wishing to grant EMI options to agree the value of the shares over which the options are to be granted with HMRC Shares and Assets Valuation (SAV). There is no charge to tax when a qualifying EMI option is exercised provided that the option exercise price equals or exceeds the value of the underlying shares when the option is granted. If the option exercise price is set at a discount to market value, then when the option is exercised that discounted amount is charged to income tax (and NICs may also be due). Agreeing the value with SAV ensures that there are no unexpected tax charges on exercise, as well as that the individual and overall limits on the total value of shares over which EMI options can be granted have not been breached. Following recent changes to the way that SAV operates, the grant of EMI options is one of the few remaining situations where it is possible to agree the value of shares in a private company with HMRC.

To agree a valuation a company must complete HMRC Form Val 231 and provide the requested information along with its suggested valuation. The value to be attributed to the shares is the price that they might reasonably be expected to fetch on the open market. SAV will then either accept the suggested value or enter into negotiations to agree an alternative value and will also confirm the time period for which that valuation will remain valid.

2. What are the Terms of Option?

The EMI Option Agreement or Scheme rules must include the following terms:

  • The date of grant.
  • That the option is granted under the EMI legislation.
  • The number or maximum number of shares over which the option is granted.
  • The price (if any) that the employee must pay on the exercise of the option or a mechanism for determining the price.
  • When and how the option can be exercised.
  • Any performance or other conditions that must be met by the employee.
  • Any restrictions on the shares, such as a risk of forfeiture.

3. What Are Disqualifying Events?

If an EMI option is granted, but a disqualifying event occurs before the option is exercised, then although the employee will still have a valid right to acquire shares, favourable EMI tax treatment may be lost. Examples of such disqualifying events are:

  • The company coming under the control of another company.
  • A change in the company’s trade to include a substantial amount of non-qualifying activities.
  • Changes being made to the share capital of the company which have the effect of increasing the value of shares under option.
  • The optionholder ceasing to satisfy the working time requirement.

NB – Growth in the company so that it has more than £30 million of gross assets or employs more than 250 full time equivalent employees is not a disqualifying event for existing options. It would however prevent the grant of any further EMI options.

We can provide guidance on how and when disqualifying events may occur, and suggest ways that they may be avoided.

4. Do You Have an EMI Share Option Agreement Package?

We draft EMI Share Option Agreements and EMI Share Option Scheme rules to meet your particular requirements.

  • Telephone Conference – to provide guidance and to take detailed instructions.
  • Share Option Agreement or Scheme rules – drafted in accordance with your instructions.
  • Guidance – written in plain English.

Why choose Legal Clarity?

Legal Clarity Solicitors have a wealth of experience in establishing employee share incentive schemes of all sorts. We can advise not just on whether your company is able to grant EMI options, but also on whether they are the most appropriate employee incentives in your situation, as well as how to combine EMI options with wider employee ownership. If an EMI Share Option Scheme is what you require, we can provide you with rules flexible enough to meet changing circumstances and draft share option agreements to meet your particular requirements. Once we know what is required, we will offer you a fixed price from £1,800 + VAT, so that you know exactly what you will have to pay before instructing us to begin.

Legal documents are often complicated, but we will do our best to live up to our name and provide guidance in plain English. 

Invest in legal support to ensure you and your employees benefit from effective EMI share options. Get in touch with us.