EMI Share Option Schemes: A Complete Guide for UK Companies

What Is an EMI Share Option Scheme?

An Enterprise Management Incentive (EMI) Share option scheme is a type of employee share option that enjoys favourable tax treatment. Under this arrangement, employees benefit from being taxed on a capital gains basis rather than through income tax, making it a highly efficient way to incentivise them. They are specifically targeted at small, higher-risk trading companies. Employees are granted options enabling them to acquire shares in their employer company at a pre-arranged point in the future, rather than being issued with shares immediately.

The point at which the option holders can exercise their options may be agreed as a future exit event, such as a sale or listing of the company. EMI options can also be subject to time-vesting and/or performance conditions, provided these are set out in the option agreement.

EMI Scheme Requirements for Companies

EMI options can be granted over the shares of any company (provided that the following requirements are met):

Eligibility for a company

• The company must be independent of other companies.
• The company must have only qualifying subsidiaries.
• The gross assets of the company must not exceed £30 million at the time of grant. (increasing to £120 million on/after 6 April 2026)
• The company must have fewer than the equivalent of 250 employees at the time of grant. (increasing to 500 employees on/after 6 April 2026)
• The company must be a trading company, or the parent company of a trading group. Certain trading activities will not qualify.
• The company (or if the company is a parent company of a group, a group member with a qualifying trade) must have a UK permanent establishment.

Eligibility for an employee

• The employee must work for the company for at least 25 hours per week, or if less, 75% of their working time.
• Employees cannot be granted EMI options if they (or their “associates”) have a “material interest” in the company whose shares are used for the scheme, or in certain related companies, i.e. the employee on their own or together with their associates must not have ownership of, or the ability to control, more than 30% of the ordinary share capital of the qualifying company or any group company.
• EMI options can only be granted to employees. They cannot be granted to non-executive directors or individuals providing their services through a company

How to Set Up an EMI Scheme: Step‑by‑Step Process

1. Check if you are eligible for EMI (see requirements above)
2. Design the scheme and prepare legal documents: This involves designing the EMI Scheme rules and form of EMI option agreement for each option holder, an employment-related securities election under section 431 Income Tax (Earning & Pensions) Act 2003 and board minutes to approve the scheme. The terms and conditions for the option scheme are flexible and can be designed according to your company’s goals.
3. Get a valuation agreed with HMRC: Get a share valuation report prepared and submitted to HMRC. Typically, share values agreed with HMRC will determine the exercise price of your EMI options.
4. Granting the EMI Options: Options should be granted to the selected employees within three months as the approved valuation remains valid for 90 days from the date HMRC approves it.
5. Company to register the EMI Scheme and notify HMRC: The deadline for notifying options granted before 6 April 2024 is 92 days after the date of grant. For options granted on or after 6 April 2024, the deadline is 6 July following the end of the relevant tax year.

How Can Waterfront Law Support Your EMI Scheme?

• Eligibility assessment: we can determine whether your company qualifies for the EMI share option scheme
• Design your EMI plan: we can produce for you a tailored EMI plan and advise on the vesting schedule, exercise conditions, and exit arrangements
• Draft EMI option agreement: we can prepare for you a clear and tailored documentation for your business
• Prepare various legal documents including: joint elections, SH01, notice of exercise, deed of adherence
• Review existing schemes: we can audit and update your current EMI arrangement and ensure compliance with the law

If you’d like to discuss how we can support you, reach out to Andrew Gordon.