Introduction to the EMI option scheme and its key benefits

Option schemes are ideal for incentivising employees to stay with the company as it grows over the longer term and share in a successful exit with the other owners of the company.   

Without an EMI scheme in place, employees might have to pay tax of 50% or more on their profit when they sell their company shares. However using EMI options means that they pay only 10% capital gains tax instead. 

For example, Carrie is granted 10,000 options today, priced at £1 per share. Five years later the company is sold, for £5 per share. She buys her shares for £10,000, sells for £50,000, and makes a £40,000 profit. In Carrie’s case, normally she might have to pay over £20,000 in tax on her gain; under EMI she only pays a maximum of £4,000. 

An EMI scheme costs a little more to set up at the beginning because of the need to include various terms and conditions required by tax legislation, and to agree a share valuation with HMRC. But it really is worth it, from the very substantial tax advantages to the high level of flexibility allowed for scheme configuration. 

The first and main benefit of EMI is the array of tax benefits for employees. There is no income tax to pay when the options are granted, or when the options are exercised to buy the shares. When an employee sells their shares, they will keep 90% of any profit. Without EMI, they might keep less than half of it. 

Second, under EMI we can agree a share valuation with HMRC as at the date that the options are first awarded (‘date of grant’), and that value is valid for ten years. The benefit is that employees can end up paying very little for their shares, and pay no income tax, and thereby make a much larger profit than they would do without the EMI.   

Third, the way that the scheme can be set up is very flexible. You can grant options to selected staff such as key management, or to a more widespread number.  The only real limit set down in legislation is that options must be exercisable within 10 years. You could use an ‘exit only’ structure; this means that the employees can only buy their shares when the company is sold. Alternatively a ‘time-based’ structure can be used, for example shares can be bought over the three years after the options are granted, rather than waiting until a company sale. 

The fourth benefit is that the options provide a very tangible incentive for key employees to stay with the company.  The prospect of a significant profit within a foreseeable period strongly encourages retention of staff, especially as most option agreements provide that options lapse automatically if an employee leaves. Because of the potential reward in the future, EMI options can also help to offset or cushion the risks and uncertainties that may be present in an early stage growing business.

Benefit five is that it’s been shown that employees feel much more aligned with the interests of shareholders and the board if they have a tangible interest in the company’s ownership.  It can be a great motivator if all stakeholders are working towards a profitable company sale, with everyone focused on building shareholder value. Finally: a psychological advantage; share options make an employee feel more appreciated, because options are a benefit that can be awarded alongside the usual salary package and they’re about the longer term. It says ‘we want you to stay with us and help grow the business, because we really value your input’.