A share option gives someone the right to buy shares in the future, but at a price that is fixed now. Share options are very useful for companies who wish to incentivise and retain key employees and an EMI (‘Enterprise Management Incentive’) share option scheme can provide significant tax advantages to those employees.
We are specialists in setting up EMI option schemes. Below you can find a guide on how the schemes work, and how we can help you.
A business can grant options over equity shares to individuals, based on a specific plan for how and when they can exercise the options, i.e. buy the underlying shares. It is a popular model in start up and early stage companies, who want good staff but who don’t necessarily have the cash to pay full market level salaries. Many established companies also use EMI schemes to reward staff in anticipation of a disposal of the company, so that they can sell their shares and make a capital gain, or for a longer term structure where dividends are the reward. Companies can structure the timing of when staff can exercise their share options in all sorts of ways, for example they could vest immediately; they could be vested at 25% of their options each year over four years; or it’s set up so that they not exercisable until an “exit” i.e. when the business is sold. In fact EMI structures can be very flexible. Most schemes provide that if an employee leaves the company, then they automatically lose their options.
Glossary – grant is when the options are given to someone. Vest is when those options can actually be exercised i.e. the options can be used to buy the shares.
The EMI Full Solution Package – everything you need to get your EMI scheme in place -
- All of the scheme agreement legal documentation you need- scheme rules, option certificates, board minutes, letters to employees
- Your share valuation agreed with HMRC
- Advice on how you want to structure your scheme
- Fully inclusive cost for up to 3 employees is £2995 + vat (then for each employee in excess of 3 it is £50 per employee).
- Add-ons: for obtaining advance assurance of scheme eligibility, £550 (rarely needed); for an ‘Unapproved option scheme’ (for non-exec directors, consultants, other non-employees) £895, or if alongside an EMI scheme it will be £695
We have set up many EMI share option schemes (both for clients and on behalf of other accounting firms) and we are able to offer realistic economic rates that suit growing entrepreneurial companies. The preparation of EMI schemes is one of our core activities and our approach is highly efficient. Typically we can deal with the documentation by phone, post and email but if you would like a ‘full service’ basis, which would include face-to-face meetings (which can encompass presentations to staff for example) we are very happy to undertake this too.
To discuss your requirements please call or email Jerry Davison – 01392-432654 or firstname.lastname@example.org
Download our pdf guide to EMI option schemes EMI option scheme guide
‘We used the Mill Consultancy when relaunching our EMI option scheme -we were looking for a sensibly priced and personal service with practical, tailored advice. We got all this and more – Jerry was highly competent and quick to understand what we were after. He has always been very helpful and responsive to subsequent queries and we will certainly use the company again for other services and/or projects.’ – X4i
‘We are a small company employing less than 20 people so the process of setting up a company share scheme was pretty daunting. The Mill Consultancy worked with us at every stage to make sure we understood the process and got the paperwork right. We’re proud of what we’ve achieved for our staff and couldn’t have got there with any degree of confidence without the expertise and patience of the Mill Consultancy’ – Primer Design
The main tax benefit of EMI share option schemes is that they avoid the income tax and NI that employees would normally be charged on the market value of any shares or options granted to them. If employees are given options under an approved EMI scheme, they are only charged capital gains tax on the increase in value over the option exercise price (what they pay for the shares), so long as that price is at or above the market valuation of the shares (as agreed upfront with HMRC).
As an example, if Jim was gifted shares or options worth say £10k today, without using an EMI scheme, he would be charged PAYE immediately at up to 45%. However under an EMI scheme, if he were granted £10k of options today, he would be charged 10% capital gains tax on any profit only when he eventually sells them. If that £10k of shares increased to say £50k on their eventual sale, and Jim makes a £40k gain, he might have to pay out as little as £3k in tax (after offsetting his annual CGT allowance). The non-EMI employee, in contrast, could pay out over £22k in total.
We make setting up a scheme as easy as possible for you.
We send you a short questionnaire to complete, with everything explained very simply. The sort of information we will need includes -
- The names of employees to be included in your scheme
- The number of share options to be granted to each individual
- The period over which the options will vest and the structure for the vesting (we can discuss this with you)
- When an employee can exercise options and buy actual shares (e.g. anytime after vesting, or only on a sale of the company)
- The price of the options, and the basis for that price (valuation)
- Your Articles and any shareholders’ agreements
‘We used Jerry Davison at The Mill Consultancy to set up our company EMI Scheme in 2013. Jerry was professional and friendly throughout, happy to answer all questions we passed his way. We are a startup and had very little knowledge of the workings of options schemes and share allocations, but Jerry was incredibly patient throughout the process. He also assisted us on some Articles amendments and other Companies House filings. The Mill Consultancy offer excellent value for money with no hidden costs. I would not hesitate to recommend them and hope to use them again in the future’ – Croud Inc
What is the “EMI”?
EMI was introduced in 2000 to assist companies in attracting and retaining key employees and to reward those employees for taking the risk to work for such companies.
The EMI allows a qualifying company to grant options over shares with a value of up to £250,000 per employee (up to a maximum of £3 million per company) on very flexible terms. Legislation now allows gains made on shares acquired on or after 6 April 2012 through exercising EMI options to be eligible for ‘entrepreneurs’ relief’ with capital gains tax at only 10% rather than 18% or 28%.
What companies qualify?
- The gross assets of the company (or the group of companies if a parent company) must not exceed £30 million. Gross assets broadly comprise all assets shown in the balance sheet.
- The company must have fewer than 250 employees.
- The company must be independent and not under the control of any other company. Shares in a subsidiary cannot be used in an EMI option, i.e. the shares must be in the parent company.
- Companies may be quoted or unquoted.
- There is no requirement that the company be resident or incorporated in the UK but the company must have a ‘permanent establishment’ in the UK. Group companies can offer EMI share option schemes to employees throughout the group, provided that all of the subsidiaries in the group are qualifying subsidiaries. Broadly, this means that the parent (or another subsidiary) must own at least 51 per cent of the share capital and fully control that subsidiary.
- Certain trades are excluded from the EMI. Excluded trades include leasing, financial activities and property development. For a group, the activities of all group companies will be treated as a single business.
What employees qualify?
To qualify, employees must:
- Work for the company (or, if relevant, any group company) for at least 25 hours a week or for at least 75 per cent of their paid working time (which includes time spent in self-employed work);
- Not have a “material interest” in the company i.e. more than 30 per cent of that company.
Are there any restrictions on the grant of options?
Each employee can only hold a maximum of unexercised options worth £250,000 in any 3-year period under the EMI. Any further options granted to an employee over and above this sum would not qualify for EMI relief.
Companies are free to set their own option period, but options must only be capable of exercise within 10 years of being granted and be exercised within that period. After 10 years the tax benefits of EMI will no longer apply to the exercise of any outstanding options.
Companies are also free to set the option price, which may be more or less than the market value of the shares on the date the option is granted. The shares over which options are granted must be fully paid up ordinary shares. It is not possible to grant an EMI option over redeemable or convertible shares.
How is the EMI operated?
A separate signed agreement will be required in respect of options granted to each employee. This enables the company to tailor each grant of an option to the particular employee.
Does HMRC supervise the operation of the EMI?
There is no need for prior approval of EMI share option schemes from HMRC – the company must simply notify HMRC within 92 days once an option has been granted. A company can however seek advance informal assurance from HMRC that it is a qualifying company.
A valuation of shares in connection with the EMI will need to be agreed with HMRC. This is important – it means that the market value of the shares is agreed by HMRC as at the date of the granting of the options and avoids any arguments later on when the employee eventually sells the shares on an exit.
Companies who grant EMI options will need to make an annual return to HMRC by 7 July each year.
What other requirements are there?
The employee must be prohibited under the terms of the grant of the option from transferring any of his rights under the option. If the option is capable of being exercised after the employee’s death, it must not be capable of being exercised more than one year after his death. There are provisions in the legislation for dealing with the EMI options if the company that granted them is the target of a successful take-over. In certain circumstances the holder of the option can agree with the acquiring company to surrender his option in return for a replacement option to acquire shares in the acquiring company.
What exactly are the tax advantages of EMI options?
No income tax or national insurance contributions (NICs) are payable when EMI options are granted.
If the option’s exercise price is set at the same or a higher price than the agreed market value of shares on the date that the option is granted, then no income tax or NICs are payable when the option is exercised.
Companies may set the option price at a discount to the agreed market value (or even at nil). However, where this is the case then, on exercise of the option, income tax will be payable on the discount (the excess of the market value of the shares on the date the option is granted over the exercise price paid by the employee).
When shares obtained on exercise are eventually sold the employee will be liable for capital gains tax (CGT), currently at the entrepreneur’s relief rate of 10%. The employee can also use their annual CGT exemption.
The costs of setting up and administering the EMI will be deductible expenses for the company against corporation tax. Also, after exit, the net market value of the options exercised by employees may be an allowable expense, similar to expensing normal employee remuneration.
Can the tax advantages be lost?
If at any time prior to the exercise of an option a “disqualifying event” occurs then, on a subsequent exercise of the option, an employee will be subject to income tax in the usual way as on the exercise of an unapproved share option. However, the gain will be calculated by reference to the market value of the shares on the date of the disqualifying event. Examples of disqualifying events include:
- The employee ceasing to be a qualifying employee
- The company ceasing to be a qualifying company
Other points – there are other types of option schemes available but for most growing SMEs we consider that EMI is the best if the scheme is for your ‘key’ staff. If the scheme is for a larger number of employees, please let us know, as there are other forms of scheme, such as the CSOP (company share ownership plan), or an ‘unapproved’ scheme for non-executives and non-employees that we can help you with.
Sometimes it will make sense for a company to have new Articles of Association drafted, for two main reasons – first, the company may require that it can buy back shares from an employee who has bought shares under their option agreement but who later leaves employment, so ‘buy back’ provisions will be needed, and second, a number of companies require that option shares are a different class e.g. non-voting, so the Articles will need to cover different class rights for A shares, B shares etc. If new Articles are required, we can draft them for you.
‘Following first-round venture capital investment, we were advised to set up an EMI scheme to act as a mechanism whereby the interests of the executive board and management could be aligned with that of the investors. On commencing discussions with The Mill Consultancy, we quickly found a partner to work with us and our investors and found The Mill Consultancy to be patient and helpful during the formation of the scheme. We are now looking to implement an unapproved scheme and will not hesitate to use The Mill Consultancy to complete this work for us’. – Aerothermal Group