If you are investing into a company which has an existing 'EMI' share option scheme for employees, you need to check whether the terms of your investment may impact on the tax status of those options (and any future options the company may look to grant).
Typically we see problems arising in two areas:
Under the rules for EMI options, the investee company cannot have any arrangements in place under which it can be controlled by a corporate investor. This means that if you are looking to take the right to step in and exercise control, on certain default events, the company may no longer be eligible to grant EMI options. It may also affect the tax status of options already granted.
Changes to share rights
Secondly, existing options may lose their tax-favoured status if the share rights are changed in certain circumstances, particularly if either (i) the change has an impact on the value of the class of shares under option, or (ii) the class of share under option is being re-designated, or converted into another class.
In either case, we'd recommend some preliminary due diligence is done on the issues to identify any potential problems. If needs be, you can get a view from HMRC. This offers certainty and is also useful as and when you exit the business. However, this can take two to three weeks, so needs to be addressed early on in the deal timetable.
EIS or SEIS funds
We are seeing currently a lot of activity in the funds-formation market around establishing EIS funds. With inward tax relief at 30%, and the potential for no capital gains tax on exit, EIS is proving increasingly attractive to individual investors. And for fund managers, an EIS fund offers a potential extra source of funding to co-invest alongside existing funds on any transaction which meets HMRC's criteria for EIS investment..