EMI Share Options Schemes: Requirements, Benefits & Timelines

Enterprise Management Incentive (EMI) schemes are backed by the UK government with the aim to provide a tax-efficient avenue for SMEs to reward their employees with share options.

EMI schemes offer tax advantages to both employees and the granting company, while also being flexible in the way they can be stipulated when it comes to the time frames and conditionality that the options can be exercised under.

Requirements for EMI schemes

Business and employees have two distinct sets of requirements in order to be eligible for an EMI scheme.

The business must:

1. Have less than 250 employees;
2. Not exceed £30m in assets;
3. Be independent (i.e. not having a parent company with a majority of ownership or control);
4. Not operate in one of the disqualifying sectors, such as banking, farming, property development, legal services, leasing and a few more…

The employees must:

1. Spend at least 25 hours per week (or 75% of their total working time) working for the company as an employee;
2. Not hold more than 30% of the company shares;
3. Not hold options worth more than £250,000 (at the time of grant—not at the time of exercise).

The benefits of EMI schemes

The advantages of setting up an EMI share options scheme over other existing frameworks (think growth shares or company share option plans) are its tax-efficiency and flexibility.

Tax-wise, EMI schemes trigger two tax liabilities:

1. at the time of exercise of the options, Income Tax is due on the difference between the market value established by HMRC at the time of grant and the agreed-upon exercise price, only if this difference is higher than zero
2. at the time of sale, Capital Gains Tax is due on the difference between the market value of the shares at the time of sale and their market value at the time of exercise—however CGT is due at a discounted rate due to the Business Asset Disposal Relief (BADR) being applied*

In both cases, the tax advantages granted by EMI schemes out class any other share UK share scheme.

*BADR is only applied if the shares are sold at least 24 months after the options being granted.
For the remainder of the 2024/25 tax year, the CGT rate with BADR is 10%. This will increase to 14% in the 2025/26 tax year and to 18% in 2026/27. That means the CGT advantages of EMI shares will decrease over the next few tax years.

That’s not all: companies offering EMI schemes are eligible for a Corporation Tax relief equal to the difference between the market price of the options being exercised and the exercise price. The relief is available upon exercise of the options.

When it comes to flexibility, EMI share option schemes can be structured for the option grant to be conditional to time-of-service and performance targets.

Good leaver and bad leaver policies can be enforced to both protect good employees who move on from the company and ensure that bad leavers are not taking advantage of the options they were granted.

Even good leavers, however, must exercise their options within 90 days to be eligible for the EMI benefits, since when they stop working for the company they no longer satisfy their eligibility criteria and in so doing they trigger a disqualifying event.

The EMI timeline

Setting up an EMI scheme starts with you and your trusted advisor establishing that the company, selected employees and share options are eligible for the scheme.

Then, you must apply for a valuation approval where HMRC underwrites your business value which underpins the subsequent tax implications at the time of exercise of the options.

The valuation is valid for 90 days, within which you must authorise the employee share pool and start granting the options under the conditions designed in your EMI scheme with the help of your lawyers and accountant.

Finally, you have 92 days from the first grant to register your EMI scheme, share options and their recipients with HMRC.