What is an EMI Scheme?
An EMI scheme, explained simply, is a tax-advantaged share option plan. Designed for small and medium-sized businesses in the UK, it allows companies to grant share options to key employees. This incentivises and retains talent while offering significant tax benefits. However, to ensure compliance and maximise benefits, businesses must understand the legal framework. It is important to seek expert legal advice, if necessary.
How Does an EMI Scheme Work?
Under an EMI scheme, a company grants selected employees the option to acquire shares at a fixed price. These options can be exercised at a future date, typically when certain performance conditions are met. Additionally, upon an exit event, such as the sale of the company. The key advantage is that employees can benefit from the company’s value increasing, while enjoying favourable tax treatment.
Tax Benefits of an EMI Scheme
EMI schemes offer substantial tax advantages for both employees and employers. Employees only pay Capital Gains Tax (CGT) on the profit when they sell their shares, rather than Income Tax. If the shares qualify for Business Asset Disposal Relief (previously Entrepreneurs’ Relief), CGT can be as low as 10%. Employers can also claim a Corporation Tax deduction on the difference between the market value of the shares at exercise and the price paid by the employee.
Who Can Qualify for an EMI Scheme?
To qualify for an EMI scheme, a company must meet specific criteria set by HMRC. It must have gross assets of £30 million or less, be independent, and have fewer than 250 full-time employees. Certain industries, such as banking, farming, and legal services, are not eligible. Employees must also work at least 25 hours per week or dedicate 75% of their total working time to the business.
Setting Up an EMI Scheme
Establishing an EMI scheme requires careful planning and adherence to HMRC guidelines. Seeking employment law advice is crucial to avoid potential pitfalls. Companies must determine the number of options to grant, set the exercise price, and establish vesting conditions if applicable. It is also advisable to obtain an HMRC valuation agreement. This ensures the share price is fair, and avoids unexpected tax liabilities. Legal and tax professionals can assist in structuring the scheme effectively to maximise its benefits.
Key Considerations and Potential Risks
While EMI schemes offer compelling advantages, companies must consider potential risks and administrative requirements. These include compliance with HMRC regulations, potential dilution of existing shareholders, and clear communication with employees about the scheme. Proper documentation and ongoing management are crucial to maintaining compliance and maximising the scheme’s effectiveness.
For tailored legal advice on EMI schemes, contact Seven Legal today
EMI schemes provide a powerful tool for attracting, retaining, and motivating key employees while delivering significant tax advantages. However, careful planning and professional advice are essential to ensure compliance and optimise the scheme’s benefits. At Seven Legal, we offer tailored legal assistance to the UK’s most ambitious founders. Whether you need employment law advice, guidance on setting up an EMI share scheme, or general legal assistance, our team is here to help. Contact us today to learn more about how we can support your business.
Author: Bill Cogan
Bill is a dual-qualified lawyer, licensed in both England & Wales and New York, with a Master's degree from the University of California, Berkeley. As the founder of Seven Legal, Bill delivers practical, commercially focused legal advice to high-growth tech companies and their investors.
Seven Legal provides stage specific legal advice for fast growth technology companies. Built on advising hundreds of founding teams in the UK, US and India with funding, scaling and exiting high growth ventures, our expert tech lawyers will be a growth enabler for your business.
