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E- business – Outline of “Enterprise Management Incentive Options” ("EMI")

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Law is a complex subject and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

What is an EMI option?

EMI options are granted by companies to recruit and retain key employees. E businesses competing for talent against bigger established companies, who can pay higher salaries, can use EMI options as a tax effective way into equity for employees.

Limits on Options

There is plenty of scope for smaller companies to use the scheme. The total value of shares in a company which may be subject to unexercised EMI options at any time is £3 million. The maximum entitlement of an individual EMI option holder at the date of grant of the EMI option is £250,000.

There are some requirements which generally must be satisfied throughout the term of the option. They relate to the company, the employee and the shares. The company has a wide discretion as to what triggers the right for the employee to exercise the option and acquire the shares. It can be the company or the employee reaching certain financial targets or the company being bought or listed on the stock market.

The business must be a “Qualifying Company”

You have to be a “qualifying company”. This is technical and expert advice is needed however in very broad terms the company must:

  • be independent

  • have a net value less than £30M

  • carry on a qualifying “trading activity”. Certain trades are excluded from the scheme and it is essential to check this at the outset

  • have a UK permanent establishment i.e. have a business presence in the UK

  • have less than 250 employees

The options can only be granted to “Eligible Employees”

The employee must be:

  • employed

  • work at least 25 hours a week or if less, 75% of his working time

  • not own 30% or more of the ordinary share capital in the company

The Shares which can be subject to the options

The company can only grant options over shares which are:

  • ordinary shares in the qualifying company

  • fully paid up

  • not redeemable

The option granted must:

  • be capable of being exercised within 10 years

  • not be assignable

Tax Treatment of EMI Options

On the grant of the options there is no tax chargeable in respect of the grant of an EMI option for either the employee or the employer.

On the exercise of the Options

Where the option is to acquire shares at at least their market value at the time the option is granted there is no tax charge in respect of the exercise of the option for either the employee or the employer. There will be an Income Tax charge on an exercise of an option to acquire shares at less than market value.

On the disposal of any shares acquired pursuant to the exercise of an EMI option there will be a charge to Capital Gains Tax on the difference between the disposal proceeds less broadly the price paid for the shares.

Entrepreneurs’ CGT relief available

If an EMI option holder satisfies the one year holding requirement between the grant of the EMI option and the disposal of the shares acquired on exercise of the EMI option, entrepreneurs' relief may be available to reduce the rate of capital gains tax payable to 10% for gains up to a lifetime limit of £10 million. In other words the time when the employee holds the option counts for qualifying for entrepreneurs’ relief.

What next?

If you want to take it further check your company and the key employee(s) qualify under the scheme. Scheme rules need to be prepared and an option agreement with the employee. The event which triggers the exercise of the option needs to be carefully defined.

November 2017
David Anderson
Solicitor-Advocate and Chartered Tax Adviser
Sykes Anderson Perry Limited