When is the best time to create an EMI share option scheme?

📘 Overview

In theory, the best time to set up an Enterprise Management Incentive (EMI) scheme is as early as possible, ideally before your company has built up significant value. Timing matters because it directly affects how attractive the share options will be to employees and how much benefit they can ultimately gain.

💡 Why Early Setup Matters

The earlier an EMI scheme is implemented, the lower the company’s share valuation is likely to be. This means employees can be granted options linked to a lower share price. When they later exercise those options, after the company has grown and become more valuable, their potential return is significantly higher.

Example:

If a company grants share options when each share is valued at £1, and the value later rises to £10, employees stand to gain £9 per share (before tax). If the same scheme were set up later, when the company’s shares are already worth £5, the potential gain would be smaller.

🔍 What Happens If You Wait Too Long

If the company has already been trading successfully for several years, perhaps after one or more investment rounds, the share valuation at the time of granting options will be higher. As a result:

• The discount employees enjoy when exercising their options will be smaller.
• The overall reward employees receive will be lower than if the scheme had been introduced earlier.
• The administrative and valuation process may be more complex, especially if multiple share classes or investors are involved.

✅ Practical Considerations and Costs

Although EMI schemes offer generous tax advantages and can be a powerful retention tool, they are not cost-free. There are set-up costs, valuation fees, and ongoing administration to manage.

Before proceeding, it’s worth consulting an expert adviser (such as Barnes & Scott) to:

• Determine the optimal timing for your EMI scheme
• Ensure your company meets HMRC eligibility requirements
• Negotiate a favourable valuation with HMRC
• Align the scheme with your growth stage and team size

📊 Typical Timing: Barnes & Scott’s Recommendation

In most cases, Barnes & Scott recommends clients establish an EMI scheme after trading for at least one year, once the company shows clear traction and growing value. At this stage, you’re more likely to justify the costs and effort involved, while still benefiting from a relatively low valuation.

🧮 Updated Tax/Relief Note

It’s important to note recent updates to relevant reliefs:

• The relief previously known as Business Asset Disposal Relief (BADR) is still relevant when shares acquired under EMI are sold, but the rate has changed: as of 6 April 2025, the rate is 14 %.
• The annual capital gains tax (CGT) allowance is now £3,000.
• Ensure you check the actual reliefs applicable at the time of sale, as taxation may differ depending on individual circumstances.

Key Points Summary

• Start early ideally before your company’s value rises significantly.
• Waiting too long may reduce the potential upside for employees.
• Factor in costs EMI schemes require professional setup and maintenance.
• Seek expert advice to ensure you meet all HMRC requirements and obtain a fair valuation.
• Be aware of updated tax reliefs (e.g., the 14 % rate for BADR-type reliefs from April 2025 and the £3,000 CGT allowance) when the options are exercised and shares sold.