EMI Share Options

Overview

EMI share options are a tax-advantaged HMRC-approved scheme designed to reward selected employees and help organisations attract and retain talent. Through this scheme, a company grants employees the option to buy shares at an agreed price within a specified future period, up to ten years. Employees can exercise their options to purchase shares at the agreed price, and there is no income tax charge on any increase in share value between the grant date and the exercise date. However, income tax applies if the options were granted at a discount. If options are not exercised within ten years, they lose their tax-advantaged status, so timely exercise is crucial.

Qualifying Conditions

Company Conditions:

1. Small Trading Company: The company must be classified as a small trading company, with gross assets not exceeding £30 million and fewer than 250 full-time employees.

2. Permanent Establishment: The company must have a permanent establishment in the UK and engage in qualifying trades. Trades that do not qualify include financial services, legal services, farming, and property development.

3. Independence: The company must not be a subsidiary of another company. However small, quoted companies can offer EMI options if they meet the size criteria.

4. Share Value Limit: The total value of shares under EMI options cannot exceed £3 million.

Employee Conditions:

1. Employment Status: Options can only be granted to full-time employees (working at least 25 hours per week). Exceptions exist for part-time employees, provided they work at least 75% of their total hours for the company.

2. Material Interest: Employees with a material interest (holding over 30% of shares with associates) cannot participate in the scheme.

3. Value Limit: The maximum value of shares at the grant date cannot exceed £250,000 for each employee.

Tax Implications

For Employees:

• There is no income tax charge when an EMI option is granted. Income tax arises at exercise only if the option was granted at a discount.

• If the option was granted at a discount, the income tax charge upon exercise will be based on the lower of the market value at the grant date and the MV at the exercise date.

• Capital gains tax applies when employees sell the shares, taxed at a reduced rate of 10% under Business Asset Disposal Relief (BADR). There is no minimum ownership requirement for BADR, as long as the employee remains eligible and at least two years have passed since the grant date.

Example:

Alex is granted an EMI option for 1,000 shares in X Ltd at £2 per share in January 2023, with an MV of £4 per share. Alex exercises the option in January 2025, when the MV is £6 per share. Alex sells the shares in January 2026 for £8 per share. Alex is a higher rate taxpayer.

Tax Computation:

• At Grant (Jan 2023): No tax charge.

• At Exercise (Jan 2025):

  • Income tax charge: Lower of MV at grant (£4) and MV at exercise (£6) less the amount paid (£2).

  • Income tax calculation:

    • MV at grant: £4,000

    • Amount paid: (£2,000)

    • Employment income: £2,000

    • Income tax charge: £2,000 x 40% = £800.

      
      

• At Sale (Jan 2026):

  • Sales proceeds: £8,000

  • Amount paid for options: (£2,000)

  • Amount charged to income tax: (£2,000)

  • Capital gains: £4,000

  • Annual Exempt Amount: (£3,000)

  • Chargeable gain: £1,000

  • BADR rate @ 10%: £100

  • CGT liability: £100.

For Companies:

• The company can claim a Corporation Tax (CT) deduction when the employee exercises the option.

• CT relief equals the difference between the original share value at the award date and the MV at the exercise date, which can provide significant tax relief.

• If granted at a discount, the company claims relief for the discount amount and any amount that would have been taxed.

• If options are granted at MV, relief is based on the taxable amount of the shares exercised.

• Costs associated with setting up the share scheme are not qualifying deductions.

Potential Pitfalls of EMI Shares

Disqualifying events can lead to the loss of tax and NIC relief. Such events include:

1. The company loses independence (e.g., becomes a subsidiary).

2. The company stops conducting qualifying trades.

3. The employee ceases to be eligible.

4. Significant changes occur in the terms of the option.

5. Non-commercial alterations to the share capital increase share values under the option.

Employee has 90 days from the disqualifying event to exercise their option to retain the income tax relief.

Speak to an Expert

Seek professional help if considering an EMI Share Option plan for your business. If you have questions about EMI share options, please get in touch with our Tax team, and we’ll be happy to assist you.

Authored by: London Team