EMI (Enterprise Management Incentive) share options are a type of employee share incentive scheme that have advantageous tax implications for both the company granting the options and the employees receiving them. These options are targeted at smaller, ambitious companies and helps them recruit and retain the best staff by rewarding them with an equity stake in the company.
What are EMI share options?
An EMI share option is a right to acquire shares in the company at a future date given to a qualifying employee by a qualifying company. The shares must be:
- fully paid up;
- ordinary; and,
- capable of being exercised within ten years of the date of grant.
The terms of the option should be set out in an EMI Option Agreement, which outlines the fundamental details of the options, including:
- the grant date;
- the number of shares under the option;
- the exercise price / method for determining it; and,
- when and how the option may be exercised or lapse.
Once the agreement has been signed by the company and employee, the option grant must be notified to HMRC within 92 by way of the on-line reporting system using the Government Gateway If a formal valuation from HMRC is sought, then the company must send Form VAL231 to HMRC. Any valuation from HMRC is valid for a period of 120 days only, although this time period is subject to review as it was extended from 90 days during the pandemic.
Any company hoping to benefit from the scheme must satisfy a number of conditions, including:
- be an independent trading company or group with gross assets of £30 million or less;
- have fewer than 250 full-time employees at the time of grant;
- be a trading company and not trade in excluded activities such as banking, provision of legal services or property development; and,
- have a UK permanent establishment.
It is also worth noting that the total value of unexercised EMI options granted by the company must not exceed £3 million at any time by reference to the Actual Market Value (AMV) of the shares at the date of grant.
A qualifying employee must:
- be an employee of the company i.e. not a consultant or non-executive director;
- work for the company for at least 25 hours per week, or if less, 75% of their working time; and,
- not have a “material interest” in the company i.e. enjoy beneficial ownership of / or have the ability to control more than 30% of the ordinary share capital of the company.
No one employee may hold EMI options with a value in excess of £250,000. This limit is calculated by reference to the AMV of shares held as at the date of grant. If an employee reaches this limit, they cannot receive further EMI options for a further three year period.
Tax advantages of issuing EMI share options
The scheme offers generous tax advantages as set out below:
- Corporation Tax (CT) deductions may be available when EMI options are exercised. Relief is given in the accounting year in which the options are exercised. The CT deduction equals the gain made by the employee upon exercise.
- No Income Tax (IT) or National Insurance Contributions (NICs) on the grant of the option;
- no IT or NICs on exercise provided the exercise price is equal to or greater than the AMV of the share options at the date of grant. If the exercise price is less than the AMV of the shares at grant – IT and NICs will be due on the difference; and,
- Capital Gains Tax (CGT) will be payable on the sale of options for any capital gain above the AMV of the shares as at grant. Advantageously, employees can benefit from Business Asset Disposal Relief (BADR) at a rate of 10%, provided the shares are sold more than 24 months after grant. BADR is subject to maximum gains of £1 million (lifetime limit).
Key points to note
Some questions are set out below, which address some common misconceptions about EMI share option schemes.
What value will be attributed to the EMI options?
Although there is no requirement to obtain a formal valuation from HMRC it is highly recommended as the relationship between exercise price and the AMV of the options at grant affects the tax treatment of any gains. For example, if the company grants the options with an exercise price that is less than the AMV at the date of the grant, IT will be due on the difference between AMV and exercise price.
If HMRC are asked to provide a formal valuation of the EMI option shares, they will provide two valuations:
- 1) Actual Market Value (AMV) – This is the value attributed to the shares accounting for any restrictions on the shares which reduce their value or have adverse tax effects e.g. the fact these shares are vested over time. This figure is the used to set the tax points for shares when they are exercised.
- 2) Unrestricted Market Value (UMV) – The higher figure of the two, this values the shares as if they have no restrictions affecting their value. This is used when calculating the total value of EMI shares granted by the company or held by the individual.
What is a disqualifying event? Are there any tax implications?
Certain events can happen after EMI options are granted which will be classified as disqualifying events. If one of these events occur and the options held in the company are not exercised within 90 days, IT will be payable on the difference between AMV as at the date of the disqualifying event and the AMV on exercise.
- a) The company becomes a subsidiary of another company (is taken over). This is broad enough to include internal reorganisations where a new holding company is incorporated on top of the company issuing EMI options.
- b) The company ceases to meet the trading requirements. This could occur if the company ceases trading or commences non-qualifying trade activities such as investment activities.
Do the company directors have authority to allot the EMI options?
EMI shares are classified as an “employee’s share scheme” (s1166 CA 2006) and as such there is no statutory restriction on directors’ authority to allot options. However, this authority is subject to the company’s Articles of Association, which may include restrictions or conditions affecting the allotment of shares. If the Articles do contain conditions or even a restriction on the size of the company’s share capital, the requirements will need to be adhered to or amended via special resolution which requires the approval of shareholders holding 75% or more of the total voting rights in the company.
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