The benefits of implementing an EMI Scheme or Restricted Shares in an EOT-owned business

5 mins

Posted on 18 Jun 2024

The benefits of implementing an EMI Scheme or Restricted Shares in an EOT-owned business

Employee Ownership Trusts (EOTs) have gained significant popularity as a means of business succession and employee ownership in recent years. They offer a compelling way to ensure business continuity, enhance employee engagement, and drive long-term growth. They are also a high tax efficient way for business owners to sell their businesses.

However, to maximise the benefits of an EOT, it may be crucial to align the interests of key employees with a more direct link to the overall goals and achievements of the business. This is where implementing an Enterprise Management Incentive (EMI) scheme or restricted shares can play a pivotal role.

What is an EMI Scheme?

The Enterprise Management Incentive (EMI) scheme is a tax-advantaged share option plan available to UK businesses, including EOT’s. It allows companies to grant share options to key employees, providing them with a tangible stake in the business's future success.

The EMI scheme offers several tax benefits, including potential tax-efficient gains on share value increases and no income tax or National Insurance contributions on the grant of the options.

What are Restricted Shares?

Restricted shares are another form of employee equity, where employees receive shares that are subject to certain conditions or restrictions. Sometimes an EMI scheme is not appropriate, and restricted shares can fill any incentives gap.

Whilst an employee may hold actual shares, unlike EMI options, they can be subject to restrictions such as vesting periods, performance targets, or holding periods, before the shares become fully owned and tradable by the employees.

Benefits of EMI Schemes and Restricted Shares in an EOT-owned business

1. Enhanced employee motivation and retention

One of the primary advantages of implementing an EMI scheme or restricted shares is the potential to significantly enhance employee motivation and retention. Whilst employees will benefit from the business being EOT owned, sometimes when they have a direct personal financial stake in the business, they are more likely to be motivated to contribute to its success.

With EOT businesses, employee motivation is still absolutely key, and where sellers of EOT businesses have outstanding consideration due to be paid over time, retaining the best performing staff is important.

2. Alignment of interests

Both EMI schemes and restricted shares serve to align the interests of employees with those of the business. In an EOT-owned company, where the trust holds a controlling interest on behalf of the employees, it is essential to ensure that key employees are still incentivised to work towards the overall success of the business which will in turn benefit all employees via the EOT.

By tying employee rewards to company performance, these equity arrangements help to create a unified vision and a shared sense of purpose.

3. Tax efficiency

EMI schemes are particularly attractive due to their tax efficiency. Employees can benefit from substantial tax advantages, including lower rates of Capital Gains Tax on the sale of shares and potential exemption from income tax and National Insurance on the grant of options.

For the company, EMI schemes can also be tax-efficient, as they may qualify for corporation tax deductions on the difference between the market value of the shares at the time of exercise and the amount paid by the employee.

4. Attraction of talent

Offering attractive compensation packages is crucial for attracting top talent. An EMI scheme or restricted shares can be a significant draw for high-calibre employees who are looking for more than just a salary.

The prospect of owning a part of the company and sharing in its future success can make a business an employer of choice, thereby enhancing its ability to recruit and retain the best talent.

5. Long-term stability and growth

For an EOT-owned business, long-term stability and growth are paramount. By implementing EMI schemes or restricted shares, the company can foster a culture of long-term thinking and commitment among employees.

These equity arrangements encourage employees to focus on sustainable growth and value creation, which can lead to improved business performance and resilience over time.

6. Succession planning

EOTs are often used as a succession planning tool, allowing business owners to pass on their company to employees while ensuring its continued success.

EMI schemes and restricted shares complement this goal by providing a clear path for employee ownership and engagement. They help to smooth the transition by giving employees a vested interest in maintaining and growing the business, thus supporting the overall succession strategy.

An important piece of the jigsaw

In summary EMI options and restricted shares form an important piece of the jigsaw when considering an EOT. They add additional motivation to key staff to supplement the main EOT benefits. Retention of the best staff as part of an EOT can ensure that seller debt is repaid, whilst ensuring that all staff benefit from a successful business moving forward into employee owned.

Contact us

For further information on EOTs and/or EMI schemes, please visit our services pages or contact a member of our team.

Thomas Clark

Thomas is an experienced corporate lawyer who advises clients on matters including business sales and purchases, shareholder agreements and articles of association, reorganisations, preparation for sale, and employee incentives.

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Garry Karch

One of the UK's best known Employee Ownership Trust advisers, Garry heads the firm's EOT Services team.

  • Head of EOT Services
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The articles published on this website, current at the date of publication, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your own circumstances should always be sought separately before taking any action.

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