Top tips for securing EMI option tax treatment ahead of your sale

Listen in to Matthew Rowbotham and Kathy Granby discuss top tips for securing EMI option tax treatment ahead of a company sale. They highlight the benefits of EMI options, common pitfalls in implementation, and the importance of early planning and accurate documentation. Key advice includes obtaining specialist legal support, ensuring proper valuation agreements, and maintaining meticulous records to avoid costly mistakes during due diligence. 

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Some key takeaways to consider are:

Understand your EMI options

• Definition: Enterprise Management Incentive (EMI) options are a popular method for small, independent private companies to incentivise and reward employees using shares delivered via flexible, tax-advantaged share options.
• Benefits: EMI options offer significant tax savings for employees, allowing them to enjoy capital gains tax treatment on the growth in value of their option shares, with rates as low as 10% under Business Asset Disposal Relief.

The importance of early planning

• Timing: Grant EMI options well before any sale arrangements to avoid complications. Early grants also typically result in a lower market value, leading to better tax outcomes.
• Valuation: Secure reliable valuation agreements with HMRC at the time of the grant and ensure full disclosure of any exit plans.

Common Pitfalls to Avoid

• Grant Timing: Avoid granting options too close to a sale, as any “arrangements” for a sale can disqualify the options from EMI status from the outset.
• Documentation: Maintain meticulous records, including proper documentation and signatures, to ensure the EMI tax treatment is valid.
• HMRC Notification: Notify HMRC of the EMI grant within the required timeframe to avoid disqualification.

Legal and Administrative Precision

• Specialist Support: Engage specialist legal support when setting up an EMI option scheme to navigate the complex legislation and HMRC guidance.
• Ongoing Compliance: Ensure all conditions for EMI qualification are met at the time of grant and monitor these throughout the life of the option.

Due Diligence and Sale Preparation

• Scrutiny: During a sale, buyers will scrutinise the EMI option scheme. Ensure everything is in order to avoid complications and potential deal breakers.
• Health Checks: Conduct health checks on your EMI scheme to identify and rectify any issues before they become problematic during due diligence.

Top Tips for Success:

• Legal Advice: Always seek specialist legal advice when making changes to the EMI option plan or share capital, or when exercising discretion over existing EMI options, to avoid inadvertently spoiling the scheme.
• Proactive Measures: Address any potential issues early, preferably before the options increase significantly in value and are exercised.