Part 1: Starting well to finish well
Offering key employees share options can be a powerful way to motivate and retain talent. With recent changes to the EMI rules expanding eligibility, more businesses may now qualify and be considering this for the first time.
When it works EMI is highly attractive because gains on the shares may benefit from favourable capital gains tax treatment (rather than income tax) with no National Insurance contributions.
When it doesn’t, the consequences can be expensive - including unexpected income tax costs and even a reduction in sale proceeds for existing shareholders.
This three‑part series looks at the main issues we see in practice when businesses implement EMI. While EMI schemes can be commercially flexible, the legal conditions are strict and operate on a pass‑or‑fail basis.
Getting the structure right from the outset is critical to avoid problems later.
In this first article we focus on the structural and timing issues that must be addressed upfront and which generally cannot be fixed later. In short: start well to finish well.
How late can I leave the grant of EMI options?
Our message is simple: don’t leave it too late.
EMI options cannot be granted once there are “arrangements” in place for another company to acquire control of the business. This is a broad concept and can catch more than many expect - including informal or non‑binding understandings. Entering into Heads of Terms will typically stop the grant of further EMI options.
Timing issues can also arise where negotiations begin or new financial information becomes available, as this can invalidate an agreed HMRC share valuation.
We have an option pool of 10% - can individual awards just be expressed as a percentage of the pool?
No, not if the options are to qualify as EMI.
The legislation requires the option agreement to state the actual number (or maximum number) of shares under option. Expressing awards purely as a percentage of share capital or the pool without a cap (in the form of a stated maximum number of shares) will prevent EMI qualification. In setting a cap, the individual and aggregate EMI limits should be considered.
We want flexibility - can we decide the detail on vesting, exercise and leavers later?
Care is needed.
EMI status requires the key terms of the option to be set out in the option agreement from the start, including when and how the option can be exercised. While giving the board discretion can seem attractive, using that to amend the fundamental terms or change when the option can be exercised risks HMRC treating the option as having been cancelled and re‑granted – which would lose EMI status. There is often a workable middle ground, but this requires careful drafting.
Can we grant EMI options and forget about them until a sale?
Unfortunately, not.
EMI options must be notified to HMRC by 6 July following the end of the tax year in which they are granted. Missing this deadline will usually mean EMI status is lost, unless HMRC accepts there was a “reasonable excuse”.
From 6 April 2027, this notification requirement will be removed for new grants. However, annual EMI returns will still be required each year, even where there has been no activity.
Up next: Part 2: Monitoring the EMI scheme as you grow, fundraise and professionalise.
