What to do if EMI is
not available…
Amanda Flint
Contact:
T: 07786 967577
E: af@amandaflint.com or from 1st July2012 amanda.flint@uk.gt.com
EMI is not available…

This may be because:
 Your
Company does not qualify (this might be
because your trade does not qualify; or
 The individual that you want to benefit does not
qualify e.g. not working enough hours; or
 Your shares do not qualify; or
 You have too many employees.

You can use EMI but you have no more capacity
(now personal limit of £250k per person –
measured at grant)
2
First step: go back to your
objectives
“The executives should
be treated as investors –
we would like them to put
up cash into the
company”
“We know that our
management team is
key to our future
success and we want
them to share in the
growth it has created”
“We want our directors to
demonstrate commitment by
‘pay to play’ but we understand
that they are at a stage in their
lives where they are cash poor!”
“I am keeping a tight control on
cash and so it is important that
the directors have a meaningful
long-term incentive”
“I want
executives
to
participate
in a future
exit – but
not until
then”
“Achieving capital gains tax treatment
is an important financial element of the
incentive for executives.”
3
Ask some questions:
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Valuation is key – don’t forget the minority share holder
discount!
What is the realisation point – exit? Or earlier? Who will
fund an earlier exit?
What do you want to happen if a participant leaves?
Will there be future generations of executive to
participate in the incentive – Or are you mainly focused
on the current executives?
Are you prepared to make the incentive valuable from
the outset?
4
Solution 1 –share subscription
Objectives:
 Executive – little cash
 Pay subscription price of
nominal value
 Get shares up front –
benefit from future growth
 Can add conditions to
shares – forfeit if leave
employment
 Need tax election
COMPANY
Shares
Cash
EXECUTIVE
5
Implications & Use – share
subscription
Impact
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Any difference between
nominal value & market value
is subject to income tax;
Often no PAYE/NIC – but
depends on circumstances;
No advance valuation can be
agreed with HMRC & may
have to wait until self
assessment tax return is
submitted
Executive is a shareholder
Useful where:
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The value (for tax purposes!) is
very low – it will not have NO
value;
The nominal value of the
shares is low;
You want the executive to be a
shareholder;
The implications if they leave
are well thought through – i.e.
who will buy the shares, at
what price
6
Points to note – share
subscription
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Probably helpful to undertake a valuation
exercise at acquisition – HMRC tend to use
hindsight!
Limited shelf life – as the company grows,
shares will become more valuable & entry cost
will become unattractive
Uncertainty of tax treatment will not suit very
cautious executive
But: part of shareholder ‘team’ from the outset
7
Solution 2 – partly paid shares
Objectives:
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Executive – little cash
Acquire shares at current
market value – but leave
subscription outstanding
Get shares up front – benefit
from future growth
Can add conditions to shares –
forfeit if leave employment
Tax election prudent
COMPANY
Shares
Owes
subscription
price
EXECUTIVE
8
Implications & Use – partly paid
shares
Impact
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No up front acquisition cost;
No up front income tax charge
– but may be on going tax
No advance valuation can be
agreed with HMRC – may
need adjuster clause
Shares subject to a call – tax
due if disposed of without
paying up
Executive is on risk for an
amount equal to market value
on acquisition
Useful where:
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You want the executive to buy
shares at market value but
they have no cash available;
The exposure level is
acceptable
You want the executive to be
‘on risk’ – pain as well as gain!
There is an exit likely at some
point
The implications if they leave
are well thought through – i.e.
who will buy the shares, at
what price
9
Points to note – partly paid
shares
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Probably helpful to undertake a valuation exercise at
acquisition – HMRC tend to use hindsight!
Can use an Employee Share Trust to buy shares later if
necessary
Recent tax changes mean that now need to use new
issue shares only
Very difficult to unscramble – tax cost of exit even if
value falls
10
Solution 3 – loan to buy shares
Objectives:
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Executive – little cash
Acquire shares at current
market value
Get shares up front – benefit
from future growth
Can add conditions to shares –
forfeit if leave employment
Tax election prudent
COMPANY
Cash
Shares
Cash
EXECUTIVE
11
Implications & Use – loan to buy
shares
Impact
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Same as partly paid but:
 Not subject to a call on
shares
 Easier to write off loan if
you wish to do so in the
future
Useful where:
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Same as partly paid but:
 Where you might want to
release executive from
obligations in certain
circumstances (e.g.
hardship, extreme
economic conditions,
death)
12
Points to note – loan to buy
shares
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Same as partly paid but:
 Recent
tax changes mean that loan should not come
from a third party unless it is a commercial loan
 Easier to write off loan – so long as this is lawful for
insolvency law purposes
13
Solution 4 – flowering shares
Objectives:
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Unrestricted
share value
Executive – receives shares
up front whose value
‘blossoms’ if conditions are
met;
If conditions are met –
restrictions fall away;
Can be forfeited if leaves
employment etc.
‘Flowering’
share value
EXECUTIVE
Pays subscription
price & receives
shares
14
Implications & Use – flowering
shares
Impact
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Tax trap: If you don’t pay the full
unrestricted share value when
you acquire the shares, there will Unrestricted
share value
be income tax to pay when you
sell them
 Can make election and pay
income tax up front on value
you may not receive; OR
 You can pay income tax when
you dispose of the shares –
value could be much higher
TAX TRAP
‘Flowering’
share value
Pays
unrestricted
share value
or ‘Flowering’
EXECUTIVE share value
15
Points to note – flowering
shares
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Still useful if tax is not the main issue
Need to manage expectations & communicate
regularly and clearly on the tax treatment
May be helpful where share value is low and
entry cost is also low
Can combine with loan
16
Solution 5 – growth shares
Ordinary share capital Ordinary share capital
Growth shares
EXECUTIVE
Growth shares created
Objectives:
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Executive – receives shares from a new class that only has
value if company value grows
Value low – whether or not restricted (may be hurdle);
Can be forfeited if leaves employment etc. – will need to use
tax election on acquisition for tax benefits
17
Implications & Use – growth
shares
Impact
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New class of shares – amend
articles of association;
No advance valuation process
with HMRC but a valuation
exercise advisable – may be
able to agree with HMRC
afterwards;
Executive a shareholder from
the outset
Useful where:
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The current share value is high
but you want to reward
executives for future
performance;
You want executives to
become shareholders from the
outset;
There is a change of
‘generation’ at the company
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Points to note – growth shares
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The new class of shares and the corresponding low
value has a short shelf life – especially in a fast growing
company;
If you will have a train of new joiners over the next few
years – you may need to create a new class of shares
periodically – which may mean a very complicated share
capital structure;
This could make communications on value opaque and
might also make an exit complicated
19
Solution 6 – joint ownership
Ordinary share –
current value
Ordinary share –
future value
EXECUTIVE
Trustee
Objectives:
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Executive – receives future growth on existing ordinary shares
Value low – whether or not restricted (may be hurdle);
Can be forfeited if leaves employment etc.
20
Solution 6 – joint ownership –
additional feature
Ordinary share –
current value
Trustee
Ordinary share –
future value
Unapproved option
EXECUTIVE
Objectives:
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Unapproved option over existing value to executive;
Subject to income tax on exercise – but value fixed at award;
On vesting, executive gets ‘whole’ value of share – initial value
subject to income tax, growth subject to capital gains tax –
similar to LTIP
21
Implications & Use – joint
ownership shares
Impact
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No need for a new class of
shares – keeps share capital
structure simple;
Can adjust hurdle to regulate
up front cost
No advance valuation process
with HMRC but a valuation
exercise advisable – may be
able to agree with HMRC
afterwards;
Executive a shareholder from
the outset
Useful where:
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The current share value is high
but you want to reward
executives for future
performance;
You want executives to
become shareholders from the
outset;
It is likely that you will have a
number of senior hires over the
next few years
22
Points to note – joint ownership
shares
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Simplicity of share capital structure attractive if there is to
be a later exit;
Not time sensitive – can adjust as time progresses;
Use of trustee adds third party validity to the
arrangement;
Up front tax charge unless pay market value for future
interest of shares;
Valuation exercise strongly recommended
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Summary
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There WILL be tax implications – and these cannot be
left to the individual as the company will have liabilities –
advice is essential
Don’t forget compliance issues for the company – nonreporting implications can be a high corporate cost!
Any non-UK element will need additional tax & legal
consideration
Up front planning and on-going communication to
executives are EQUALLY important
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