What is an employee option scheme?

This is the first of a series of five blogs, aimed at explaining the purpose and value of employee share schemes for both employers and employees alike.

An enterprise management incentives option (EMI option) is a type of employee share option that enjoys favourable tax treatment.  Each option scheme has its own rules. An option is granted to the individual in a separate option agreement, which in turn is subject to its rules. The purpose of an EMI option is to retain and reward staff with tax advantaged options for things like performance and length of service, among other set criteria by the grantor of the option.

EMI options typically work by granting qualifying employees the option to purchase shares in the employer company at a pre-agreed price after meeting whichever requirements have been agreed. It is important to note, the grant is for an option which is a right to purchase shares at a future date, and not a grant of shares from the outset.

If the employer company succeeds, grows, becomes more valuable, and the share value increases, the option holding staff member can sell their shares at a profit in a tax-advantaged way. EMI tax relief is available only to UK resident employees. The grant of an EMI option to an employee must be confirmed with HMRC within 90 days.

To qualify, a company must:

• have a permanent establishment in the UK;
• have gross assets of £30m or less;
• hold more than 50% of the shares in all of its subsidiaries;
• not have a parent company who holds the majority of the shares;
• carry on or be preparing to carry on a qualifying trade; and
• have fewer than 250 full time employees.

The employees to whom an EMI option is given must:

• work for the company at least 25 hours a week or, if less, 75% their working time; and
• not already have a 30% or more interest in the company.

No employee may hold £250,000 or more of unexercised EMI options, and no more than £3m of unexercised EMI options may be in issue at one time. These are market values of option shares, not par value. If either limit is breached, the scheme continues but options issued in excess of the limits lose EMI status.

In the second edition of this blog, we will look at how a company can introduce an EMI option scheme.