Regardless of recent increases to capital gains tax rates, Enterprise Management Incentive (EMI) options are still the most tax efficient way to incentivise your key people using shares.
EMI options can be exercised free of income tax and NICs, which is good news for both employees and companies. Gains are subject to CGT at the lowest available rate with Business Assets Disposal Relief applying to options that have granted at least 2 years before the shares are sold. The new rates are 14% for sales after 6 April 2025, and 18% for sales after 6 April 2026.
Leaving aside the tax breaks, though, here’s why scaling independent companies still love EMI options:
Choose your participants:
You could grant an EMI option to one big hitter, or to all your senior leadership team, or even to everyone in the company. Pick the approach that suits you best.
Choose your shares:
Many companies use a different share class in their EMI scheme – for example, shares that pay dividends at a different rate to the founders’ shares, or don’t carry any voting rights.
Choose your exercise trigger:
Most private companies operate “exit-only” options – so employees only get to exercise options and sell shares if the company sells. But you can allow employees to exercise options and acquire shares before a sale, which means they become shareholders who can, for example, receive dividends. Again, flexibility is key: you might want your key hire to acquire a direct shareholding, but other employees need to wait for the exit.
Choose how you treat leavers:
EMI options will typically lapse if employees leave, but you can apply different provisions for “good” and “bad” leavers.
Choose your exercise price:
Usually EMI options are granted with an exercise price that’s equal to the value agreed with HM Revenue & Customs. When employees exercise they pay the agreed price and there’s no tax or NICs charge. However, if you want to make your plan more affordable and attractive to your participants, you can set the exercise price at less than HMRC’s agreed value (although there will be tax to pay on the discount).
We work closely with RM2 and others to help you design and set up your EMI option scheme. If you would like to discuss any of these issues or would like further legal advice on employee share schemes get in touch on info@legaledge.co.uk
