Question 1

What is an Enterprise Management Incentives (EMI) share option scheme?

Accepted Answer

EMI is the UK's most tax-advantaged share option scheme, available to qualifying trading companies with gross assets up to £30m and fewer than 250 employees. Employees can receive options over shares worth up to £250,000 each, with no income tax or NICs on grant or exercise, and gains on sale qualifying for 18% Business Asset Disposal Relief. Enterprise Management Incentives (EMI) is a tax-advantaged share option scheme designed to help smaller, growing companies attract and retain key employees. Key features: (1) No income tax or NICs on grant or exercise of the option (if the exercise price is at least market value at grant). (2) On sale of the shares, gains qualify for Business Asset Disposal Relief (BADR) at 18% (instead of the normal capital gains tax rate of up to 24%). (3) Each employee can hold options over shares worth up to £250,000 (at grant). (4) The company must be a qualifying trading company with gross assets of no more than £30m and fewer than 250 full-time equivalent employees. (5) The company must notify HMRC within 92 days of granting the option and register the scheme. EMI is widely regarded as the most generous share scheme in the UK, and is particularly valuable for start-ups and scale-ups. Relevant legislation: Income Tax (Earnings and Pensions) Act 2003, Schedule 5 (EMI); Finance Act 2000 (original EMI legislation). Example: An employee is granted EMI options over shares worth £200,000 at an exercise price of £1 per share. After 3 years, the company is sold and the shares are worth £500,000. The employee exercises the options (no income tax on exercise) and sells the shares. The gain of £300,000 (£500,000 - £200,000) is subject to CGT at 18% BADR = £54,000. Without EMI, the gain could be subject to income tax at up to 45% = £135,000. Common mistake: Failing to notify HMRC within 92 days of granting the option. Late notification can result in the loss of the tax advantages, turning a tax-free exercise into a chargeable event.

Question 2

Does my company qualify for EMI?

Accepted Answer

To qualify for EMI, the company must be a qualifying trading company (or a qualifying subsidiary) with gross assets of no more than £30m and fewer than 250 full-time equivalent employees. Certain activities are excluded, including property development, banking, farming, and some professional services. EMI has strict eligibility criteria: (1) Independent company — the company must be independent (not a subsidiary of a non-qualifying company) and must not be under the control of another company. (2) Gross assets — the company (and its group) must have gross assets of no more than £30m. (3) Employees — the company (and its group) must have fewer than 250 full-time equivalent employees. (4) Trading activities — the company must be a trading company, not an investment company. Excluded activities include: property development, dealing in land/property, banking, financing, farming, market making, ship building, coal and steel production, and certain professional services. (5) Qualifying subsidiary — if the company is a subsidiary, its parent must be a qualifying company. (6) Permanent establishment — the company must have a permanent establishment in the UK. (7) Control — the company must not be controlled by another company that does not qualify. HMRC advance assurance can be obtained to confirm eligibility before granting options. Relevant legislation: ITEPA 2003, Schedule 5, Part 1 (qualifying conditions); FA 2000 (EMI provisions). Example: A technology start-up with 50 employees and gross assets of £5 million wants to grant EMI options to its senior team. The company is a trading company with no excluded activities. It qualifies for EMI. The company obtains HMRC advance assurance before granting options, providing certainty on eligibility. Common mistake: Assuming that a company with some investment activities is automatically disqualified. A company can have some non-qualifying activities as long as it is substantially a trading company. However, the boundary is complex and specialist advice is needed.

Question 3

What happens to EMI options when a company is sold?

Accepted Answer

EMI options can typically be exercised immediately before or on a sale of the company. The gain on the shares (sale price minus exercise price) is subject to capital gains tax at 18% BADR, rather than income tax at up to 45%. The option documentation must include appropriate 'exit event' provisions. On a sale of the company, EMI options can be exercised in accordance with the option documentation. Well-drafted EMI option agreements include 'exit event' provisions that allow the company to require exercise of options on a sale, or to accelerate vesting. The key tax treatment: (1) Exercise of the option — no income tax or NICs if the exercise price is at least market value at grant. (2) Sale of the shares — the gain (sale price minus exercise price) is subject to capital gains tax. If the shares have been held for the qualifying period (generally 2 years from grant of the option, or 1 year from exercise), the gain qualifies for Business Asset Disposal Relief (BADR) at 18%. (3) The timing of exercise is critical — if exercised too early, the employee may lose BADR; if exercised too late, the sale may not be possible. Specialist advice is essential well before the sale process begins. Relevant legislation: ITEPA 2003, Schedule 5 (EMI); TCGA 1992, Section 169I (BADR for EMI shares). Example: An employee holds EMI options over 50,000 shares at an exercise price of £1 per share. The company is sold for £10 per share. The employee exercises the options (paying £50,000) and immediately sells the shares (receiving £500,000). The gain of £450,000 is subject to CGT at 18% BADR = £81,000. Without EMI, the gain could be subject to income tax at 45% = £202,500. Common mistake: Not planning the exercise timing before the sale. If the options are exercised outside the BADR qualifying period, the gain may be subject to CGT at up to 24% (or income tax at up to 45% if the EMI conditions were not met).

Question 4

What is the difference between EMI and CSOP?

Accepted Answer

EMI is available to smaller qualifying trading companies (gross assets ≤ £30m, < 250 employees) with individual limits of £250,000 per employee. CSOP (Company Share Option Plan) is available to any company, with a limit of £30,000 per employee (increased from £6,000 in April 2023), but with broader eligibility. Enterprise Management Incentives (EMI) and Company Share Option Plans (CSOP) are both tax-advantaged share option schemes, but they differ in key respects: (1) Company eligibility — EMI is restricted to qualifying trading companies with gross assets ≤ £30m and < 250 employees. CSOP has no company size or trading requirement, so it is available to any company. (2) Individual limit — EMI allows options worth up to £250,000 per employee. CSOP allows options worth up to £30,000 per employee (increased from £6,000 in April 2023). (3) Exercise price — both schemes require the exercise price to be at least market value at the date of grant. (4) Tax treatment — both schemes provide no income tax or NICs on grant or exercise, and gains on sale qualify for BADR at 18%. (5) HMRC notification — EMI requires notification within 92 days of grant. CSOP requires approval from HMRC before the scheme is established. (6) Vesting — EMI options can have any vesting conditions. CSOP options must generally not be exercisable within 3 years of grant (except on certain events like sale or cessation of employment). Relevant legislation: ITEPA 2003, Schedule 5 (EMI); ITEPA 2003, Schedule 4 (CSOP); Finance Act 2023 (CSOP limit increase). Example: A company with 300 employees and gross assets of £40m does not qualify for EMI (too many employees and too much gross assets). It can establish a CSOP instead, allowing each employee to receive options worth up to £30,000. For a smaller company (50 employees, £5m assets), EMI is preferable as the individual limit is £250,000. Common mistake: Choosing CSOP when the company qualifies for EMI. EMI's higher individual limit (£250,000 vs £30,000) makes it far more valuable for employees. Always check EMI eligibility first.

Question 5

What are growth shares and how do they differ from EMI options?

Accepted Answer

Growth shares are a type of actual share (not an option) that only participates in growth above a 'hurdle' value. They are not subject to the EMI eligibility criteria, making them suitable for companies that do not qualify for EMI. However, they require careful structuring and a professional valuation. Growth shares (also called hurdle shares or ratchet shares) are a class of shares that are issued at a low value because they only participate in the growth of the company above a specified hurdle value (typically the current market value). Key features: (1) No company eligibility restrictions — growth shares can be issued by any company, including investment companies and companies that are too large for EMI. (2) Actual shares — the employee receives actual shares (not options), so they benefit from any growth above the hurdle immediately. (3) Tax treatment — the employee pays income tax on the market value of the shares at the time of acquisition (which is low because of the hurdle). Any subsequent growth is taxed at capital gains tax rates (up to 24%, or 18% with BADR). (4) Valuation — growth shares require a professional valuation to determine the hurdle and the market value of the shares at issue. (5) Control — growth shares give the employee actual shareholder rights (voting, dividends), which may not be desirable for the company. Relevant legislation: ITEPA 2003 (employment-related securities provisions); TCGA 1992 (capital gains tax). Example: A company is valued at £5 million. It issues growth shares to employees with a hurdle of £5 million (the current value). The shares are issued at a low value (e.g., £0.01 per share) because they only participate in growth above £5 million. When the company is later sold for £20 million, the growth shares participate in the £15 million growth, and the employees' gains are subject to CGT at 18% BADR (if qualifying) instead of income tax at up to 45%. Common mistake: Issuing growth shares without obtaining a proper valuation. If the hurdle is set too low, HMRC may treat the shares as having a higher market value at issue, triggering income tax charges.

Question 6

How much does it cost to set up an EMI scheme?

Accepted Answer

The cost of setting up an EMI scheme varies depending on the complexity of the arrangement and the level of advice needed. We provide transparent, fixed-fee quotes for EMI scheme establishment, including eligibility assessment, option agreement drafting, HMRC notification, and advance assurance. Initial discussions are informal and without obligation. The cost of setting up an EMI scheme depends on several factors: (1) The complexity of the company structure (single company vs group structure). (2) The number of employees receiving options. (3) The complexity of the option terms (vesting, leaver provisions, exercise conditions). (4) Whether HMRC advance assurance is sought. (5) Whether the company has existing share schemes that need to be reviewed or restructured. The typical components of EMI scheme establishment are: (1) Eligibility assessment — reviewing the company's trading activities, gross assets, employee numbers, and share structure. (2) Valuation — determining the market value of the shares for the exercise price. (3) Option agreement drafting — preparing the option terms, including vesting, leaver provisions, and exit event provisions. (4) HMRC notification — registering the scheme and notifying option grants within 92 days. (5) HMRC advance assurance — obtaining confirmation of eligibility. We provide transparent, fixed-fee quotes for EMI scheme establishment. Relevant legislation: ITEPA 2003, Schedule 5 (EMI). Example: A company with a simple structure (single company, 5 employees receiving options) can set up an EMI scheme for a relatively modest fixed fee. A company with a complex group structure, 20+ employees, and bespoke vesting conditions would incur higher costs due to the additional complexity. Common mistake: Focusing only on the setup cost without considering the ongoing compliance costs. EMI schemes require annual reporting to HMRC, and any changes to the option terms or the company structure may require specialist advice.

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