Individuals with a “material interest” (broadly a 30% interest or more) in the company or any of its subsidiaries, either on their own or together with one or more associates, are also unable to participate.
Limits on grant of EMIs
There is a company limit of £3m on the total value of shares (as at the grant date) which may be available under EMI options at any given time. There is also an individual limit on the value of shares (as at the grant date) which any one employee may hold under the EMI option. This limit is currently £250,000. Options under any Company Share Option Plan (CSOP) operated by the company also count towards this limit.
Tax treatment of EMIs
EMIs offer generous tax advantages to both qualifying companies and participants, as follows:
- no income tax or National Insurance contributions (NICs) are payable on the grant of the EMI option;
- normally no income tax or NICs will be payable when an employee exercises the EMI option, unless the exercise price is less than the market value of the shares on grant. In those circumstances, the difference between the grant market value of the shares (or the current market value, if lower) and the exercise price will be chargeable to income tax and possibly NICs;
- capital gains tax (CGT) is payable on the sale of the EMI option shares;
- if the share option is exercised more than 90 days after a “disqualifying event”, income tax (and, if appropriate, NICs) is payable on the increase in value of the shares between the date of the disqualifying event and the date of exercise.
- business asset disposal relief (BADR), which reduces the rate of CGT to 10% on the first £1m of lifetime gains, will potentially be available on the disposal of shares acquired pursuant to an EMI option before 6 April 2025, if the shares are sold more than 24 months after the grant of the EMI option;
- for disposals made on or after 6 April 2025 but before 6 April 2026, gains eligible for BADR will be taxed at 14% and, for disposals made on or after 6 April 2026, gains eligible for BADR will be taxed at 18%. This is much less restrictive than the usual conditions for employee shareholders to enjoy BADR.
Disqualifying events include:
- the company ceasing to carry out a qualifying trade;
- the optionholder ceasing to be a qualifying employee;
- optionholders being granted an additional tax-advantaged CSOP option, taking them over their individual (currently £250,000) EMI limit;
- the company being taken over; or
- certain alterations to the company’s share capital.
In addition to these substantial tax advantages, the employer company may also be able to claim corporation tax relief on the option gain.
Share option requirements
Employees must be able to exercise EMI share options within 10 years from the date of grant. The EMI option terms must be set out in a written agreement which must detail any restrictions on the shares.
Each EMI option must be notified, electronically, to HMRC within 92 days after its grant in order to secure the tax reliefs. For EMI options granted on or after 6 April 2024, the time limit for notifying the grant will be extended from 92 days after the date of grant to 6 July following the end of the tax year in which the option was granted.
The company must deliver, electronically, an annual return to HMRC in respect of its EMI options.
Formalities
It is recommended that unlisted companies establish the market value of the shares before EMI options are granted. The value can be formally agreed with HMRC, or the company can use its own valuation although it would then be open to HMRC to query this. HMRC valuation agreements in advance of a taxable event are now only available in a few circumstances, including for a proposed EMI option grant.
HMRC must be notified electronically of any grants of EMI options within the time periods set out above.
HMRC has 12 months to make enquiries as to eligibility. If it does not make such enquiries, and all information provided is correct, then the EMI option is deemed to qualify.
Other arrangements available
If a company is too large to grant EMI options, it may still qualify to grant options under a tax-advantaged CSOP. For more information, see our separate Out-Law guide.
If a company or the employee does not meet the qualifying criteria for either EMIs or CSOPs, it can grant share options which have no eligibility criteria and are very flexible, but which are not tax-advantaged and are subject to income tax (and, if appropriate, NICs) on exercise of the share options. Alternatively, the company may consider other arrangements, for example growth shares or the Pinsent Masons’ ExSOP™, which may offer a more favourable tax treatment than “non tax-advantaged” options. For more information, see our separate Out-Law guide.
