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Enterprise Management Incentives (‘EMI’) are widely used by companies to attract and retain top talent, whilst aligning the interests of employees with those of the company and its shareholders.

EMI options are designed to provide significant tax advantages for both the employer and the employee. However, like any tax advantaged scheme, EMI schemes have stringent conditions that need to be met and carry potential risks if not implemented correctly.

One of the potential risks is granting EMI options too close to a sale. In this article, we will explore the implications of granting EMI options too close to a sale and consider what classes as ‘too close to a sale’, based on our experience.

Implications of granting EMI options too close to a sale?

One of the primary benefits of EMI options is the tax advantages they provide to employees. However, these tax benefits may be at risk if EMI options are granted too close to a sale of the company granting the options.

EMI options were introduced by the government as a tax efficient way of incentivising employees to help grow their employing company and thus benefit from the growth they have helped create on a future exit. Therefore, there is an understanding that EMI options should not be exercised immediately but should be held for an incentivisation period of at least six months to one year before they can be exercised and qualify for the tax advantages.

If there is the potential of an imminent sale, it brings the validity of the incentivisation into question and raises questions about whether the introduction of an EMI scheme is simply to take advantage of the tax benefits, i.e., an attempt to avoid paying more tax on an exit when the shares are disposed of.

For clarity, EMI options will not be qualifying if they are granted when there are arrangements in place for a sale, i.e., arrangements by virtue of which a company could come under the control of another company. Therefore, there is a point during a sale process where it is no longer possible to grant EMI options. The definition of ‘arrangements’ is not clearly defined in legislation and determining the point at which arrangements are considered to be in place requires careful examination of the stage of the sale process and the discussions that have taken place to date.

What classes as ‘too close to a sale’?

In our experience, the appointment of corporate financiers to look for potential buyers of a company and having discussions with prospective buyers is not enough to constitute ‘arrangements’. At this early stage of the process, it is uncertain whether a buyer will be found. Furthermore, even if a buyer is identified, a satisfactory offer needs to be accepted by the seller and discussions could break down at any time.

However, although we do not consider that this would prevent the grant of EMI options, this can increase the value of the shares over which the options are to be granted and therefore also increase the price at which the options must be exercised in order to avoid an employment tax charge on exercised.

We advise our clients that a grant of options close to a sale reduces the minority discount that could be applied to the pro rata value of the shares. A minority discount applies where a shareholder’s interest in a private company does not provide them with any control or influence over the company and where there is a lack of marketability of the shares. Therefore, this lack of influence and marketability is reflected in the value of the shares by applying a minority discount. A shareholding of 50% is considered to be a minority shareholding. When a company grants EMI options to employees, they tend to be over shares equating to a small minority shareholding and therefore, HMRC will generally accept a minority discount of up to 80%, depending on the circumstances. At an early stage of a sale process, however, this minority discount may reduce from 80% to approximately 40% – 60%.. The impact of this is to increase the value of the shares over which the options are to be granted. It is therefore advisable to grant EMI options as early as possible to maximise the benefits that EMI offers. This would typically also result in a lower, justifiable market value and a more favourable tax outcome for option holders.

We consider that the stage at which arrangements for a company to come under the control of another company are considered to be in place is when a buyer has been identified, and a due diligence exercise is underway and/or Heads of Terms have been signed. At this point, it is no longer possible to grant EMI options. If EMI options are granted at this point, then they should be treated as unapproved options, which are taxed unfavourably compared to tax-approved EMI options. When the options are exercised, if the shares are considered to  be readily convertible assets (“RCAs”), both income tax and Class 1 (employees’ and employers’) national insurance contributions (“NIC”) are due on the money’s worth of the shares (the difference between the market value of the shares and the price paid to acquire them) and these amounts are collected by the employer under Pay As You Earn (“PAYE”) via the payroll.

Companies should therefore give serious consideration to the timing and implications of granting EMI options to employees to ensure that the intended benefits of an EMI scheme are maximised whilst minimising potential complications on an exit.

Mitigating the risks

To mitigate the risks associated with granting EMI options too close to a sale, companies should consider the following:

  • Plan ahead: EMI options should ideally be implemented well in advance of any potential sale. Companies should have a clear strategy for their share schemes and ensure that options are granted with ample time to meet the necessary conditions for tax advantages.
  • Consult Tax and Legal experts: Seeking advice from tax and legal experts is essential when designing and implementing EMI schemes. These professionals can help navigate the complex, regulatory and tax aspects of EMI schemes and granting options.
  • Communicate effectively: Transparent communication with employees is critical. Clearly explain the rationale behind the timing of EMI grants and the potential implications of a sale on their options.
  • Evaluate buyer concerns: Companies should be prepared to address buyer concerns regarding EMI options and be open to negotiating any necessary adjustments to the deal structure.


Whilst EMI options can be an invaluable tool for incentivising employees and realising tax benefits, granting them too close to a sale can introduce significant risks.

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