For companies that satisfy the various conditions, the Enterprise Management Incentive (EMI) is the most popular tax-advantaged share option plan available in the UK. It offers companies a flexible, tax-efficient and easy to use incentive to help motivate their senior management.
The EMI can be used by private companies, smaller listed companies and international companies with a permanent establishment in the UK. It allows companies to grant options to employees and directors to acquire shares soon after grant or at some point in the future.
As employers are not required to offer EMI options on the same terms to every employee or director, the incentive is very flexible and can be designed to meet a company’s commercial objectives.
The right to exercise the options will usually be conditional on continued employment. It may also be made conditional on meeting time or performance targets and / or on an exit being achieved.
Many of the EMI plans we implement are designed for an exit only (ie the options are to be exercised only when the company is about to be sold or list). The employees become shareholders then immediately sell their shares along with the other shareholders on the sale or listing. Such arrangements allow EMI options to be used as an incentive to supplement salary particularly by start- ups and high growth companies.
Key qualifying criteria
There are various qualifying conditions that have to be met by the company and the employee. The company or group must be:
- Independent (ie must not be a subsidiary, or under the control, of another company)
- Carry on a trade wholly or mainly within the UK
- Not carrying on certain excluded activities (see below)
- Have gross assets of less than £30 million when the EMI options are granted
- Have fewer than 250 full time equivalent employees in the group
- The shares of the company must be ordinary shares, non-redeemable and fully paid up
Companies whose trade is any ‘excluded activities’ cannot use EMI if that trade constitutes a substantial part of a company’s trading activities – the following activities are excluded:
- Dealing in investment assets or land
- Banking, insurance, hire-purchase financing or other financial activities
- Leasing or receiving royalties or licence fees
- Providing legal or accountancy services
- Certain property backed trades
- Shipbuilding, coal and steel production
Some additional tests apply for groups.
Employees (ie not a consultants or non-executive directors) are only eligible for EMI options if they work for an average of at least 25 hours a week or, if less, 75% of their working time. At the time the option is granted, the individual must not have a material interest in the business (i.e. own more than 30% of the ordinary share capital).
Overall limit on awards under EMI
A qualifying company can grant EMI options over shares valued up to £3 million. The employee individual limit for EMI options is currently £250,000. It is also possible to grant EMI options over a new class of ‘growth’ or ‘flowering’ shares rather than over the existing share capital to maximise the value awarded under the Option.
Benefits to the employee
There is no income tax and no employees’ NIC on either the grant or exercise of the options (provided that the EMI options are granted at market value).
The exercise price of EMI options can be set at market value or at a discount or premium to market value. If the options are granted at a discount to market value, the discount will be subject to income tax on exercise. Certain disqualifying events may also lead to an income tax charge.
Following exercise of the EMI options, if the value of the shares under option has increased, any uplift in value at sale will fall within the capital gains tax regime and should (subject to limited exceptions) qualify for Entrepreneur’s relief (ER).
Therefore, EMI option holders in a better position than shareholders who did not acquire their shares through an EMI. As ordinary shareholders must hold over 5% of the voting and nominal share capital and economic interest in the company for over 2 years to qualify for ER. Gains qualifying for ER are taxed at 10% rather than the usual 20% tax rate.
Benefits to the employer
There is no tax cost or employer’s NIC on either the grant or exercise of the options (subject to certain conditions). The company can also claim corporation tax relief on the difference between the market value of the shares at exercise and the option price paid. For exit only options, this can provide the seller with an opportunity to negotiate a higher purchase price for the company.
The EMI rules also enable companies to obtain agreement from HMRC on the valuation of the shares under option - providing tax and valuation certainty to both the company and employees.
How we can help
We have significant experience in designing and implementing EMI plans in a wide range of sectors to meet a company’s commercial objectives. We can:
- Advise on the choice of plan and design features, taking account of the company’s circumstances and market practice, including a review of the company’s position to determine eligibility for EMI and other share plans
- Draft the plan rules, option documents and other documentation needed to adopt the plan
- Advise on performance targets, exit plans, succession planning and the marketability of the shares
- Advise on tax-efficiencies, both from a corporate and participant perspective
- Advise on the accounting implications of the plan
- Carry out a fiscal valuation of the Company’s shares.
If you would like further information on EMI plans or any other share plan or incentive please contact Andy Goodman or Matthew Emms.
Read more on Share plans and incentives