EMI share options: a SME-friendly, tax-efficient weapon in the ‘war for talent’

Attracting and retaining key talent isn’t easy for any business, but it is particularly challenging for smaller, higher-risk, growing companies.

Without the financial resources to offer large salaries and extensive benefits packages, it can be difficult to compete against the bigger players when it comes to finding (and keeping) the best people for the job.

But a neat (partial) solution to this age-old problem may come in the form of Enterprise Management Incentives (EMI) share options – a tax-efficient way to reward and motivate key employees.

Offer employees a stake in your success with EMI share options

EMI share option plans can help a company to incentivise key people by granting them options to buy shares in the company at a future date, but at a price based on the value of the shares on the date that the options are granted. This means that, if the company increases in value over time, the employee will be able to buy shares at a discounted price.

The key features of an EMI share option plan are:

• the plan must be registered with HM Revenue & Customs and issued a unique scheme reference number;
• no income tax or national insurance contributions will be payable in relation to the option, either when it is granted or when it is exercised;
• when the employee exercises the option and then sells the shares, the employee will be liable to pay capital gains tax on the difference between the price that they paid for the shares and the sale price; and
• the option must be exercised within 10 years of being granted to benefit from the favourable tax treatment.

Companies do have a degree of flexibility over deciding what can trigger an employee’s ability to exercise their option under the EMI share option plan, but most plans are structured so that employees can exercise their options when the company is either sold or becomes listed on a stock exchange, and potentially receive a well-deserved windfall. This makes EMI share option plans ideal for growing companies that are working towards an exit within the next ten years.

How we can help

EMI share option schemes are a win-win in many ways, but they are not open to all. As with any tax-efficient scheme, there are strict qualification criteria and so not all companies and employees will be able to benefit.

We regularly work alongside accountants and tax advisors to implement employee share option structures for companies.

We also understand that growing businesses need budgeting certainty, so our fixed-fee EMI share plan legal pack includes:

• Checking your company’s articles of association and any shareholders’ agreement for changes that may be needed to facilitate the EMI share options
• Drafting the EMI plan rules and share option agreements
• Drafting any board and shareholder resolutions that may be needed
• Providing written guidance that briefly explains how the scheme works to be sent to the relevant employees
• Liaising with the accountants or tax advisors who are valuing the shares and dealing with HMRC

For an initial chat about how this can benefit your company, contact Chris Wills, corporate & commercial partner, on 07749 432733 or 01242 542905, or email chris.wills@willans.co.uk.

Chris Wills is a partner in our Legal 500-rated corporate & commercial department. He has over a decade of experience in advising businesses on a range of transactions and issues, including mergers and acquisitions, debt and equity funding, joint ventures and shareholders’ agreements, partnership and LLP agreements, group restructures and commercial collaborations. Chris advises businesses across a broad range of sectors, from start-ups and family businesses to established companies operating on a global scale. You can contact Chris via telephone on 07749 432733.