What are EMI share options?
– EMI share options enable employers to offer employees an equity interest in the business, with significant tax advantages to both the employee and employer.
– EMI share options are specifically designed for SME trading companies with growth potential and are intended to help companies recruit and retain employees by aligning employees’ and employers’ interests in the most cost effective way.
– A share option agreement grants an employee the right to exercise their option to acquire shares in a company if a triggering event occurs (such as a sale or when certain performance criteria is met). To exercise their options, employees pay an exercise price which is determined using a valuation of the Company at the time the option is granted.
Advantages of EMI share options
– If a company is eligible to grant EMI options, they will generally be the most suitable type of employee share incentive for a company to operate, as they are extremely flexible and the most tax-efficient share plan available.
– There is no income tax liability for the employee on the grant of the option. An employee who waits at least two years after the grant of the option before selling the shares can expect to only pay capital gains tax on the growth above today’s market value at the reduced rate of 10%, if the qualifying conditions for Business Asset Disposal Relief (formerly Entrepreneur’s Relief) are met. A company should also be able to claim a corporation tax deduction on the exercise of the option.
– EMI options must be capable of being exercised within ten years of the date of grant, and options can only be exercised within a period of 12 months after the option holder’s death. Otherwise, there are no restrictions on the exercise provisions that can apply to EMI options, and this flexibility means that they can be used for exit-only arrangements (where an option can only be exercised on an exit event, such as a share sale or listing), as well as for options exercisable at the end of a performance or vesting period.
– An EMI option plan is discretionary. This means that a company is able to choose which eligible employees receive options and how much each of them gets.
– The option can be granted over an existing class of shares or over a new class, such as growth shares which can be used to provide for a substantial increase in value if certain company performance hurdles are met.
– An exit only EMI option plan means that employees will not become shareholders until there is an exit opportunity for all the shareholders. Immediately after the employees exercise their options they will then sell their shares to the buyer. The advantage of this structure is that employees will not become minority shareholders in the existing ownership structure for any prolonged period of time.
Implementing an EMI option scheme
– A scheme can be put in place within a matter of days. However it is prudent for a company to obtain advance agreement from HMRC regarding the value of the option shares and assurance that the company qualifies to grant EMI options.
– Normally, a company will adopt a set of plan rules which allows the company to grant options to several employees at the same time and new EMI options to more employees in future, all on the same terms.
– There are a number of qualification criteria that a Company must meet to be eligible to grant EMI options, as well as eligible employee criteria, including:
– a company must be an independent trading company with gross assets of no more than £30 million and fewer than the equivalent of 250 full-time employees; and
– an employee must work for the company for at least 25 hours per week, or if less, 75% of their working time,
certain trading activities will not qualify and there are detailed rules relating to the independence requirement, the trading requirement and the shares that can be used for EMI options.
– The grant of any EMI options must be notified to HMRC within 92 days of the date of grant.
Murrell Associates LLP 09 September 2020
The information provided in this article is a summary for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at the above date. Appropriate legal and financial advice should be sought for specific circumstances before any action is taken.