How 10 years fly by with EMI

Background

Enterprise Management Incentive (‘EMI’) schemes are specifically designed for private trading companies who wish to recruit and retain key employees. They provide employees with significant tax benefits and are much more flexible than other HMRC approved share arrangements. EMI schemes typically operate by giving employees the right to buy shares in the company at an agreed price, ahead of a company sale. The price is set when the option is granted and this provides an incentive for the individuals to grow the business.

WSM have helped a large number of companies to set up Enterprise Management Incentive (EMI) schemes. However, we have found that ‘older’ EMI schemes have been facing a conundrum…

The issue

EMI options expire after 10 years under the current rules. This can be problematic if the company wishes to continue with an EMI scheme as it must create a new scheme to replace the old one. In this scenario, it is common for new options to be granted.  However, to avoid income tax consequences at the point that the EMI option is exercised, the exercise price must be set at the market value at the date the option is granted.  This means that with replacement options the new exercise price could be significantly higher than under the original option, reflecting the fact that the company has grown over time. This is discouraging for the existing option holders who may have been around since the start of the original scheme and will be resentful that the owners have not managed to procure a sale.

Example

Building Rome Ltd established an EMI scheme in June 2016 for three key members of the management team. Each individual received EMI options over shares representing a 2% stake in the company. The options are exercisable in the event that the company is sold and a market value of £5 per share was agreed with HMRC in 2016. This was set as the ‘exercise price’ of the option. It is now February 2026 and unfortunately a sale of the business has not materialised, despite it going from strength to strength in terms of its results (the truth is that the main shareholder has been loath to sell). The EMI shares are now worth £20 each reflecting the increase in trading performance. Unfortunately for the individuals, the 10-year limit for their EMI options is June 2026 and it is unlikely that the company will be sold before then.

The company wishes to continue incentivising the individuals through an EMI option scheme. However, the new options are given an exercise price of £20, wiping out the last 10 years of hard work! This would be a difficult discussion for the company to have with the individuals (although perhaps not all bad because the option holders would still benefit from a significant minority discount).

November Budget announcements

The 2025 Budget announced several relaxations to the EMI rules, including an increase in the:

• gross assets test (from £30m to £120m)
• maximum number of employees condition (from 250 to 500); and
• maximum value of unexercised EMI options (from £3m to £6m).

These changes will mean more companies will qualify for EMI from 6 April 2026. However, it was also announced that EMI options granted on or after 6 April 2026 will expire after 15 years. Helpfully, this change will also apply to existing EMI contracts which have not already expired or been exercised (although the wording of any existing option agreements will need to be updated to benefit from the extension).

WSM’s view

This means that the option holders in the example above will enjoy the full benefit if the agreements are changed and the company is sold by June 2031. It will also benefit a number of our clients, although we feel sorry for the option holders of companies who renewed their EMI schemes over the last year or two and just missed out!

Businesses should be aware that any paperwork will need to be updated for the extension to apply to existing contracts. Companies should also not overlook the significant increases to the eligibility limits announced at the 2025 Autumn Budget, as many more businesses and employees will be able to benefit from the EMI rules from 6 April 2026. Despite the watering down of Business Asset Disposal Relief in recent years, EMI schemes still represent a very tax efficient way of incentivising and rewarding key employees.