Recognition of share option awards as valid EMI share schemes

Article reference: UK-IA-EMP13
Last updated: September 2022 | 9 min read

Enterprise Management Incentives (EMI) share schemes are one of several types of share option schemes for employees. They differ from others by being tax advantaged or tax efficient for both companies and employees.

They are designed to help small, higher risk companies recruit and retain employees who have the skills to help them grow and succeed. They are also a way of rewarding employees for taking a risk by investing their time and skills to help small companies achieve their potential.

The main piece of legislation that is applicable is Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (abbreviated to ITEPA 2003), but it is by no means the only piece of law that you need to consider.

An EMI scheme as a tax-advantaged reward scheme

EMI share schemes are popular because they are tax efficient (or 'tax advantageous') for both the company and the employees.

The grant of the option is tax-free. Normally there is no income tax or National Insurance contributions (NICs) for the employee to pay when the option is exercised.

Nor are there normally any employer NICs to pay.

If the shares are sold at a gain, any capital gains tax (CGT) charge may be reduced because taper relief starts from the date that the option is granted.

You may wish to read more about tax advantages of EMI share schemes.

Requirements for a scheme to qualify as an EMI scheme

In order for the share option scheme to qualify as an EMI scheme, certain requirements must be met. These are as follows, and expanded on in the rest of this article.

  • the scheme has been notified to HMRC within 92 days of the grant;
  • the employee is eligible;
  • the terms of the option qualify;
  • the type of share under option qualifies; and
  • the company whose shares are under option is a qualifying company.

Qualifications for the employee

For an employee to be eligible for the scheme, he or she must:

  • work for the company, or one of its group companies for at least 25 hours per week, or, if less, for 75% of his or her working time per week; and
  • not own more than 30% of the ordinary share capital of the company.

You can read more about employee eligibility.

Terms of the option

We have a much longer article on the terms of the option agreement to qualify for an EMI share scheme. Two important ones relate to purpose and maximum entitlement.


The options must be granted for commercial reasons to recruit or retain employees in a company, and not as part of an arrangement one of the main purposes of which is to avoid tax.

Maximum entitlement

An employee may not hold unexercised qualifying EMI options that have a market value of more than £120,000.

If an option granted to an employee causes the £120,000 limit to be exceeded, the excess will not qualify as an EMI option.

The market value of any shares for this purpose is the price they might reasonably be expected to fetch on the open market, free from any restrictions or risk of forfeiture to which they may be subject. The value is taken at the date of grant of the option.

If the shares under option are quoted on the London Stock Exchange, the market value is based on the prices on the Stock Exchange’s Daily Official List. If shares are not quoted on the London Stock Exchange, the company may offer its own valuation. In that case, HMR&C may enquire into the valuation.

Performance conditions are not taken into account when determining the market value of the shares under option.

Qualifying companies

The requirements that companies have to meet for options to qualify under EMI are similar to the requirements for the Enterprise Investment Scheme, the Corporate Venturing Scheme and Venture Capital Trusts. However, both quoted and unquoted companies can qualify for EMI.

In summary, the company must:

  • be independent (and not be controlled by another company);
  • have only qualifying subsidiaries (including qualifying property managing subsidiaries after 17 March 2004);
  • trade in the UK (more than 50% of sales must come from the UK);
  • have gross assets valued under £30 million (this is measured at the time the option is granted and applies to the consolidated assets of the group where there is more than a single company);
  • employ fewer than 250 people (at the date of grant); and
  • not undertake certain excluded activities (including dealing in shares, property development, provision of legal or accountancy services, shipbuilding, coal and steel production).


A company whose shares are subject to EMI options must be independent, that is, not being a 51% subsidiary (more than 50% of its ordinary share capital owned by another company), or controlled by another company (or another company and persons connected with it).

Qualifying subsidiaries

For options granted before 17 March 2004:

All of a company’s subsidiaries must be qualifying subsidiaries. That is, the company whose shares are subject to EMI options must:

  • possess, directly or indirectly, at least 75% of the share capital and the voting power of the subsidiary;
  • be entitled to receive at least 75% of the assets of the subsidiary, in the event of a winding up or in any other circumstances, if they were all distributed; and
  • be entitled to at least 75% of profits of the subsidiary available for distribution to shareholders.

For options granted on or after 17 March 2004:

All of a company’s subsidiaries must be qualifying subsidiaries. That is, the company whose shares are subject to EMI options must hold, directly or indirectly, more than 50% of the share capital of the subsidiary.

A company will not qualify if it has a property managing subsidiary which is not a 90% subsidiary of the company. A property managing company is one whose business consists wholly or mainly in the holding of managing of land, buildings or interest in land.

Gross assets

The value of the company’s gross assets must not exceed £30 million at the date the EMI option is granted.

If the company is a member of a group of companies, the limits are applied to the gross assets of the group as a whole.

Trading activities

A qualifying trade is a trade carried on wholly or mainly in the UK on a commercial, profit making basis, and which does not, to any substantial extent, include certain excluded trading activities, listed later in this section.

Carrying on research and development from which a qualifying trade will be derived, or benefit, is treated as carrying on a qualifying trade (but preparing to carry on research and development does not count as preparing to carry on a qualifying trade). The derived or benefiting trade must be carried on by the same company, or by another company in the same group.

Research and development means activities that are treated as research and development in accordance with normal accounting practice, but excludes oil and gas exploration or appraisal.

Single companies

If a company is not a member of a group it must exist (apart from any incidental purposes) wholly for the purpose of carrying on one or more qualifying trades. It must also be either carrying on a qualifying trade, or preparing to do so.

Parent companies

Where the company is the parent of a group, the business of the group must not consist to any substantial extent of carrying on activities other than qualifying activities. At least one company in the group must meet the same conditions as those described for the single companies.

Excluded trading activities

A trade will not qualify if one or more excluded activities together amount to a substantial part of it. Excluded trading activities are:

  • dealing in land, commodities or futures, or shares, securities or other financial instruments;
  • dealing in goods, otherwise than in the course of an ordinary trade of wholesale or retail distribution;
  • banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities;
  • leasing (including letting ships on charter, or other assets on hire) or receiving royalties or other licence fees;
  • providing legal or accountancy services;
  • property development;
  • farming or market gardening;
  • holding, managing or occupying woodlands, any other forestry activities or timber production;
  • operating or managing hotels or comparable establishments, such as a guest house or hostel, or managing property used as a hotel or comparable establishment;
  • operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home;

Providing services or facilities for a business carried on by another person if:

  • the business consists to a substantial extent of excluded activities; and
  • a controlling interest in the business is held by a person who also has a controlling interest in the business carried on by the company providing the services or facilities.

Two exceptions to the excluded activities are:

  • the receipt of royalties and licence fees, where the amounts received can be attributed to the exploitation of relevant intangible assets. A relevant intangible asset is one, the greater part of which (in terms of value) has been created by the company carrying on the trade, or by another company in its group. Intangible assets are defined in line with normal accounting practice; and
  • ship chartering, where the ship is owned by the company and certain other conditions are satisfied. This exception does not apply to oil rigs or pleasure craft.

What if a company goes into receivership or liquidation?

Where a company is in administration or receivership, it is not regarded as ceasing to meet the trading activities requirements because of actions taken as a consequence of this. This is subject to the actions being taken for commercial reasons, not as part of a scheme of arrangement for the avoidance of tax.

Summary of terms relating to EMI share schemes

CSOP option

A Company Share Ownership Plan (CSOP) option granted to an individual under the provisions of Schedule 4 ITEPA 2003.

Disqualifying event

An event which results in an option ceasing to be an EMI option qualifying for relief.

EMI option

An Enterprise Management Incentive option granted to an individual under the provisions of Schedule 5 ITEPA 2003.


The company employing the individual to whom options are granted under the EMI option.

Qualifying company

A company, which satisfies the requirements of Part 3 of Schedule 5 ITEPA 2003.

Qualifying subsidiary

A subsidiary, which satisfies the requirements of Part 3 of Schedule 5 ITEPA 2003.

Qualifying trade

A trade, which satisfies the requirements of Part 3 of Schedule 5 ITEPA 2003.

Recognised Stock Exchange

A stock exchange designated as a recognised stock exchange by order of HMRC under Section 841(1) (b) Income and Corporation Taxes Act 1988.

Schedule 5

Schedule 5 Income Tax (Earnings and Pensions) Act 2003.

Net Lawman offers a number of share option agreements, with some of the templates suitable for motivating and rewarding employees.

© 2000 - 2024 Net Lawman Limited.
All rights reserved