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Enterprise management incentive (EMI) share options are designed to assist smaller companies with potential growth and future development and attract and retain the most suited employees for their business.
Companies also use EMI share options as they attract generous tax treatment (as usually there is no income tax or National Insurance contributions (NICs) payable on the grant of the EMI option).
It is important to consider seeking advice from an accountant before taking steps to introduce an EMI share option plan.
There have been a few recent changes to the rules around EMI share option plans from 06 April 2023, which are discussed below.
What is an EMI share option plan?
EMI options are a popular way of incentivising employees in a company as an EMI share option plan can be tailored (subject to the satisfaction of working time and other criteria) to suit the relationship between the individual employee involved and the company, or EMI share options can be drafted for all employees in a company as part of a scheme.
The conditions to exercise the options may be flexible and subject to specific performance targets or simply by a minimum time requirement.
Legal requirements to introduce an EMI share option plan
There are several statutory requirements for a company to qualify to introduce an EMI share option plan, some of which will be satisfied at the time of the grant of the relevant EMI share option plan.
The requirements include:
Qualifying company
- It must be independent of other companies and have only qualifying subsidiaries.
- The company's gross assets must not exceed £30 million at the time of grant.
- It must have less than 250 full-time employees.
- The company must be a trading company or the parent company of a trading group. Certain trading activities will not qualify.
- The company must have a permanent UK establishment.
Qualifying Shares and Employees
Generally, EMI share options can be satisfied by newly issued shares or by the transfer of existing shares from a shareholder.
The shares subject to the EMI share options must also be fully paid up.
In addition to the above, to be eligible to be granted an EMI share option, an employee must work for the company (or group) for at least 25 hours per week, or if less, 75% of their working time.
It is also important to note that EMI share options can only be granted to employees and cannot be granted to non-executive directors or consultants.
When can the EMI share options be exercised?
The EMI share option plan (and any relevant EMI share option agreement) can determine when and under what conditions EMI share options can be exercised.
The EMI share options must be capable of being exercised within ten years of the date of the grant.
In the event that the options are exercisable upon death, they can only be exercised within 12 months after the option holder's death.
Recent changes concerning the rules around EMI share option plans
As part of the Spring 2023 Budget, the government announced changes to EMI share option plans, including:
- Removing the requirement for the company to set out within the option agreement the details of any restrictions on the shares to be acquired under the option; and;
- Removing the requirement for the company to declare that an employee has signed a working time declaration when they are issued an EMI share option. It does not remove the working time requirement itself.
From 6 April 2024, it is anticipated that the government will also extend the deadline for notifying an EMI share option from 92 days following the grant to 6 July following the end of the tax year.