By Andy Gray
May 6, 2025
In blogs 1-3, we explained: 1) what an EMI scheme is; 2) how to set up an EMI scheme; and 3) the tax advantages attributable to such schemes. Now your EMI scheme is set up, the company and the employee are reaping the tax benefits, but what happens if you need to alter the EMI scheme?
WHY AMEND AN EMI OPTION?
There are a plethora of reasons why a company may seek to amend an EMI scheme. Notable reasons include but are not limited to:
- the performance criteria are no longer capable of being achieved;
- amendment to allow an employee to keep options when their employment is finished;
- the market value of the shares is less than the exercise price of the option;
- the number of options shares in issue needs changed to reflect changes in the share capital of the company.
HOW IS THE EMI OPTION AMENDED?
As the option agreement is a standard contract, it can be amended by agreement between both parties easily enough, or the amendment is allowed for in the scheme agreement. Whether an alteration requires board or shareholder approval will depend on the drafting of the scheme and the agreement.
ARE THERE ANY RISKS?
By far the greatest risk when amending an EMI option is that HMRC may take the view that it is the grant of a new option. The danger here is that a new option must include a new calculation of the tax market value of the shares under option. The point of issuing EMI options is that they are tax advantaged remuneration for employees. If the company has done well, HMRC may argue that there has been an increase in the market value of the shares under option, which means the employee will need to pay more tax on them, thereby reducing the remuneration and the benefit of the scheme in the first place. Shares issued under an EMI qualify for Business Asset Disposal Relief (BADR), but only if the option (or shares actually issued under it) have been held for 24 months. BADR under the EMI option schemes is 10%, not the standard 20%, of capital gains tax. If the amended options were considered new options by HMRC, then the clock for BADR would reset meaning you may pay 20% capital gains instead of the intended 20% (until the 24 month period has elapsed).
WHAT CHANGES RESULT IN A “NEW” OPTION SCHEME?
HMRC guidance indicates that a “fundamental” change to the terms of an option under an EMI scheme means a new option is created. HMRC regard a change to the number of option shares, the exercise price, or the timing of acquisition to be a fundamental change. Only a de minimis change is allowed without creating a new option. If the change amounts to the grant of a new option, the existing EMI option is released. Any consideration received for the release will also be chargeable to income tax.
WHAT IS A “DE MINIMUS” CHANGE?
Given the precarious nature of amending an EMI option scheme, and the loss of tax benefits as noted above, it is imperative that you seek the advice of HMRC. It may be possible to achieve pre-approval from HMRC of the proposed amendment. Seeking HMRC guidance and approval is strongly advised, as it allows you to see if the amendment will be approved as a de minimis change without losing the benefits. This will in turn, give peace of mind to the option holder and the company.
CONCLUSION
The main benefit of granting an EMI option is to remunerate employees in a tax advantaged way. Losing that tax advantaged status may negate the entire exercise.
If you would like to discuss the information outlined in this blog post, please get in touch with Daniel from our corporate team.
