What happens to EMI options when selling a company to an Employee Ownership Trust?

Selling to an Employee Ownership Trust (EOT) is a popular succession route for owner‑managed businesses, particularly where founders want to support long‑term continuity and employee engagement.

However, where a company already has Enterprise Management Incentive (EMI) options in place, selling to an EOT raises several practical and tax questions for founders and option holders alike.

This article explores how EMI options typically interact with an EOT sale, alongside the tax implications and practical issues to consider.

How do existing EMI options affect an EOT sale?

While existing EMI options do not prevent a sale to an EOT, they do prompt several considerations that must be addressed within the transaction.

A common concern from option holders is where a sale to an EOT, which requires more than 50% of the shares to be sold to the trust, would automatically trigger the exercise of their options and crystallise a gain. In most cases the answer is no.

EMI schemes are generally designed around a sale to a third party, such as a trade buyer or Private Equity fund. A sale to an EOT or an Employee Benefit Trust is not treated as a third-party disposal, and modern EMI agreements will often explicitly state than an EOT sale does not trigger option exercise.

What usually happens to existing EMI options in an EOT sale?

In most EOT transactions involving EMI schemes, the existing options are cancelled, and a new EMI scheme is implemented after the EOT is in place.

A typical sequence may look like this:

Existing EMI options are cancelled.
The founders sell shares to the EOT.
A new EMI scheme is introduced, granting options to the same individuals.

Why new EMI options can be more valuable after an EOT sale

In certain cases, cancelling and reissuing EMI options can benefit option holders. Following a sale to an EOT, the company usually has a long-term obligation to generate surplus profits and pass them to the EOT, which then uses those funds to repay the founders for their shares. This repayment period can last seven to ten years, or even longer.

That obligation effectively depresses the value of the company’s shares, and as a result, EMI options granted after the sale are often issued at a significantly lower market value than those granted previously.

For option holders, this can mean:

A significantly lower exercise price.
A potentially larger upside if the business grows over time.
A strong incentive to key management to pay down the EOT’s vendor loan.

Although this depends on the specific numbers involved, it is a key factor which makes the establishment of new EMI options after a sale to an EOT more attractive.

Can employees benefit from both EMI options and the EOT?

Employees cannot typically benefit from both EMI proceeds on a third‑party sale and EOT benefits as employees. This is because EMI options gains only arise when there is a third-party sale, and as stated earlier, a sale to an Employee Ownership Trust is not a third-party sale, but an internal succession route.

HMRC may also consider this as an excessive or duplicated benefit. This can be confusing for employees, particularly where they see founders receiving cash on the EOT sale while their own options are cancelled. Clear communication is essential here, because, while it may feel as though option holders are missing out in the short term, their overall position is often unchanged, or even improved once new incentives are installed.

What are the practical issues for EMI holders in an EOT sale?

EMI options are rarely exercised on an EOT sale

EMI options are designed to reward management for growing the value of the business. An EOT, by contrast, is usually a partial exit rather than a full sale. Therefore, allowing option holders to cash out on an EOT sale would:

Create significant funding pressure on the transaction.
Undermine the incentive to grow the business post‑EOT.
Risk key individuals exiting the business prematurely.

For these reasons, EMI options are rarely exercisable on an EOT sale in practice.

Cancelling and reissuing options resets the two-year BADR clock.

EMI options benefit from favourable Business Asset Disposal Relief (BADR) rules. Firstly, unlike other shareholders, EMI option holders do not need to meet the minimum 5% shareholding requirement to qualify for BADR. Additionally, the two-year holding period for BADR starts from the date the options are granted, rather than when they are exercised.

However, if EMI options are cancelled or reissued, such as during an EOT sale, then the two-year clock resets, and the holding period starts again from the new grant date.

The impact of this reset has become less significant over time. With the BADR rate now at 18%, compared to the standard capital gains tax rate of 24%, the difference between the two rates is narrower than it once was. As a result, many EMI option holders are less concerned about the timing of BADR qualification, especially if a near-term sale is not expected.

An EMI option granting a right to more than 5% of the company can exclude an employee from EOT benefits

Anyone who owns or has arrangements to acquire more than 5% of a company’s shares is treated as an excluded participator and cannot benefit from the EOT.

It is crucial to note that this rule does not only apply to shares already owned, but also applies to arrangements, including EMI options. An EMI option granting a right to more than 5% of the company can therefore exclude an employee from EOT benefits, even if they have not yet exercised the option. This often comes as a surprise and needs to be factored into planning at an early stage.

HMRC clearance only covers founders’ capital gains, not the EMI tax position

Sales to an EOT typically involve an application for Transaction in Securities (TiS) clearance from HMRC. This clearance is for the benefit of the founders and confirms that the sale will not be treated as a disguised dividend. It does not confirm anything about the EMI tax position.

While EMI schemes are disclosed as part of the clearance application, HMRC’s response is solely concerned with the founders’ capital gains treatment, not with how EMI options are handled.

The communication risk

In practice, the most challenging aspect of EMI options in an EOT sale is often communication.

Option holders may see headline valuations and calculate what their stake might be worth today, without fully appreciating how an EOT works or how replacement incentives can improve their long‑term position.

Managing expectations, explaining the rationale, and ensuring documentation is clearly understood are critical. Poor communication can delay, or even jeopardise, a transaction.

Why “tweaking” an existing EMI scheme rarely works

Some businesses consider keeping their existing EMI scheme and making amendments to accommodate the EOT, but this is risky in practice. HMRC treats anything more than a very minor change to EMI terms as creating a new scheme, even if the underlying documentation is not fully replaced. For that reason, cancelling the old scheme and implementing a new one is often cleaner and more defensible from a tax perspective.

Valuation, funding and the bigger picture

EMI options do not change the valuation of a company. They determine who owns what proportion of that value, not what the company is worth.

From a structuring perspective, advisers focus on the final ownership position. For example, if the goal is for the EOT to hold 55% of the shares after accounting for EMI dilution, a higher percentage may need to be sold initially.

Funding considerations are usually driven by the EOT itself. EMI only becomes relevant if options are exercised and cash needs to be paid out, a situation that is uncommon.

Final thoughts

EMI options and EOTs can work well together, but they require joined‑up thinking across tax, valuation and transaction structuring.

Founders are not the only stakeholders in an EOT sale. EMI option holders also need to understand how their position changes and why, in many cases, it can be better in the long run.

Early advice and careful planning are key to getting this right, and this is where seeking expert help comes in. If you’re considering an EOT sale or need guidance on EMI options, our SCF and Tax advisers are here to help. Contact our team using the form below to discuss your situation and ensure your transaction is structured for maximum benefit. We’ll guide you through the process and help you navigate the practical and tax implications with confidence.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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