EMI is a highly tax-efficient means of rewarding, incentivising
and retaining qualifying employees.
It is a tax-advantaged share option scheme for smaller listed
and privately-held companies. The main benefit of EMI is that
employees participate in share growth through an option without
incurring an income tax or national insurance liability and at
advantageous capital gains tax rates. There are also generous
corporation tax advantages for the employer.
The employee may hold options over fully-paid shares up to the
grant value of £250,000. The total grant value of unexercised
EMI options that a company can issue is £3m. The company or
group has to satisfy qualifying conditions including regarding the
nature of its trade. Its gross assets may not exceed £30m and
the full-time equivalent number of employees must not exceed
How does an EMI work?
A qualifying, broadly full-time, employee is awarded options
over shares in the employing company (or parent company if a
group). The option will specify any exercise price and when the
option may be exercised. It may include any performance or other
conditions that must be satisfied before the option is exercisable.
The options must be capable of exercise within 10 years.
When the conditions are satisfied, the employee may exercise the
option paying the agreed price (if any). The employee then owns the
shares and will be subject to capital gains tax when the shares are
The exercise price of the option may be more or less than the
market value of the shares at the option grant date.
Corporation tax deduction
The employer will usually qualify for a statutory corporation
tax deduction when the employee exercises the options equal to the
difference between the exercise price and the market value of the
shares at exercise.
Income tax and NIC relief
No income tax or national insurance liability arises on the
grant of the option.
Subject to some disqualifying exceptions, where the grant
exercise price is at least equal to the then market value of the
shares, no income tax arises on the exercise of the option.
If the options have been granted at an exercise price below
market value, there is an income tax charge on exercise based on
the lower of the market value at grant or at exercise less the
exercise price and any amounts paid by the employees for the grant
of the option.
If a disqualifying event occurs, tax benefits can be lost after
90 days. Thereafter, any future growth in value from that date will
be liable to income tax on exercise.
For companies that are listed, or where there is a market for
the shares, any income tax arising from a disqualifying event or
because of a discounted exercise price will be collected through
PAYE and there will also be a national insurance liability.
Capital gains tax relief
A capital gains tax liability may arise when the employee later
disposes of the shares. The chargeable gain will be based on the
sale proceeds less the price paid to exercise the option and the
amount on which any income tax liability arose on exercise, subject
to the special rules for share cost 'pooling' where the
employee also holds other company shares.
The employee may also enjoy entrepreneurs' relief (ER),
resulting in a CGT rate of 10%, on EMI share disposals provided the
option was granted at least 12 months before the disposal date. The
12 month holding period required for ER runs from the date of
grant, and not the date of exercise. There is no minimum
How we help
Our service can include:
drafting customised scheme rules that
comply with the legislation;
preparing a tax memorandum and
explanatory booklet if required;
obtaining advance assurance from HMRC
on the qualifying status of the company;
obtaining HMRC agreement of the
market value of shares at the award date;
assisting with online registration
and all HMRC reporting requirements.
Under current law, where a business subject to corporation tax or income tax reallocates an existing asset into its trading stock, the basic rule is that there is a deemed market value disposal of the asset...
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