EMI options – not just for anticipated exits

It is widely recognised that improvements to the EMI scheme legislation in recent years means that they are an attractive and relatively low cost way of incentivising and retaining key employees.

However, it is fair to say that most people tend to think about EMI schemes where a sale of the business is envisaged in the short to medium term:

  • Employees will then exercise their options to acquire shares on an ‘exit event’ using the proceeds of the third party sale that immediately follows to pay the exercise price.
  • Their tax advisors will have hopefully agreed a low market value (AMV) for the shares with HMRC on grant of the options, resulting in a sizeable profit (for the employee) and tax relief (for the company).

What if there is no prospect of a sale on the horizon?

In order to qualify for EMI status, an option must be granted “for commercial reasons in order to recruit or retain an employee” and not as a part of tax avoidance.   An employer may want to get shares into key employees’ hands without going down the Employee Shareholder Status route of amending employment contracts etc.  The absence of a sale on the horizon isn’t a barrier, as an EMI scheme can be structured so that the options are capable of being exercised pretty much any time after grant.


What are the benefits?

As well as the psychological benefit of having shares in their hands rather than options, the employee will be in a position to receive dividends from the company.  Despite the increase in the income tax rates on dividends from April 2016, the £5,000 annual tax free allowance will mean dividends remain attractive to many.


What else?

The employee acquires the shares at the exercise price (AMV on grant) on exercise, which the company may agree to fund by way of a bonus.  The company may then claim a corporate tax deduction equal to current market value of the shares, less the exercise price, although this will be negligible given the short time between grant and exercise.  The employee is now a shareholder, can receive dividends and will become entitled to Entrepreneurs’ Relief on an eventual disposal after 12 months has lapsed from the date the options were granted!




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