EMI Share Option Planning: A Practical Guide for Business Owners

Enterprise Management Incentives (EMI) are widely regarded as the most tax-efficient way for qualifying UK companies to reward and retain key employees using equity. Unlike many employee share schemes, EMI options carry no income tax on exercise (provided the option was granted at an agreed market value) and qualify for Business Asset Disposal Relief (BADR) on the resulting gain — delivering an effective rate of 18% on the uplift from exercise to sale (as at June 2026, with the BADR rate at 18% for 2026/27 on gains within the £1m lifetime limit).

For business owners seeking to align key employees with long-term value creation without diluting cash resources, EMI represents a powerful tool. This guide explains the conditions, the planning considerations, and the pitfalls to avoid.

Who Qualifies? The Grant Conditions

Not every company or employee can participate. The scheme operates within strict boundaries:

Company Conditions

The company must:

• Be a qualifying trading company (or parent of a qualifying group). Investment holding, property development, financial services, and legal/accountancy activities are specifically excluded.
• Have gross assets of £30m or less at the time of grant.
• Have fewer than 250 full-time equivalent employees.
• Be UK tax resident (or UK-permanent-establishment based).
• Be independent: not a 51% subsidiary of another company.

The gross assets and employee thresholds are assessed at grant date. A company that subsequently grows beyond these thresholds does not lose existing options retrospectively, but cannot grant new EMI options until it re-qualifies (if ever).

Employee Conditions

Each option holder must:

• Work for the company (or a qualifying subsidiary) for at least 25 hours per week, or, if fewer, for at least 75% of their total working time.
• Not hold (immediately before grant) more than 30% of the ordinary share capital of the company.

The 25-hours/75% test catches founders who have reduced their working hours or consultants brought in on a part-time basis. HMRC has challenged options granted to individuals whose "working time commitment" evidence was thin.

Limits

The company-wide limit is £3 million in unexercised EMI options at any time (measured by the agreed market value at grant). No single employee may hold unexercised EMI options with a market value at grant exceeding £250,000. Options granted in excess of these limits lose their EMI status and become "non-qualifying" options taxed as employment income on exercise.

Tax Treatment on Exercise and Sale

On Exercise

If the option was granted at, or above, the market value agreed with HMRC (the "unrestricted market value" or UMV at grant), there is no income tax and no NIC on exercise. The employee acquires shares at the option price; the discount to current value is not a taxable event.

If the option was granted at a discount to UMV (a common arrangement to make options economically attractive immediately), the income tax charge at exercise is limited to the amount of the discount — i.e., UMV at grant minus the exercise price. This is generally still more tax-efficient than unapproved options, where the full spread at exercise is taxable.

On Sale

The gain from sale (proceeds minus the market value at date of exercise — or, more precisely, the amount already taxed as income) is a capital gain. If the employee has held the shares for at least two years from grant date (not from exercise), they qualify for BADR, currently taxing the gain at 18% for 2026/27 (the rate rose from 10% to 14% in 2025/26 and to 18% from 6 April 2026), within the £1m lifetime limit.

This two-year qualifying period for BADR runs from grant, not from exercise — a significant advantage over non-qualifying options where the two years runs from share acquisition.

Vesting Schedule Design

Vesting schedules determine when options become exercisable. Design choices include:

Time-based vesting: options vest in tranches over a period (commonly three to four years, with a one-year cliff — no vesting in year one, then monthly or quarterly thereafter). This is simple and widely understood.

Performance-based vesting: options vest on achievement of defined milestones (revenue, EBITDA, product launch, funding round). Performance conditions must be documented carefully in the option agreement; HMRC does not require pre-approval of vesting conditions but expects them to be "objective and measurable."

Hybrid vesting: time plus performance, common in PE-backed businesses where there is a clear exit horizon.

For EMI purposes, there is no legislative requirement for a vesting schedule — options can be immediately exercisable. However, commercially, vesting schedules serve as retention tools: if the employee leaves before options vest, unvested options lapse.

Good leaver/bad leaver provisions: option agreements should specify whether a departing employee is treated as a "good leaver" (retirement, illness, redundancy — may exercise vested options) or "bad leaver" (resignation, dismissal — unvested options lapse, vested options may also lapse or be purchased at intrinsic value). These provisions interact with EMI tax rules: if the employee leaves and exercises within 90 days of the disqualifying event, the income tax-free treatment on exercise is preserved.

The HMRC Valuation Process

Before granting EMI options, companies must agree the share value — the UMV — with HMRC's Shares and Assets Valuation (SAV) team. This is done by submitting a valuation proposal via HMRC's online system. The agreed value then becomes the basis for determining whether any discount (and therefore income tax at exercise) arises.

The valuation process typically involves:

1. Preparing a valuation report (often prepared by the company's accountants), showing the methodology — usually a multiple of EBITDA, net assets, or a DCF — adjusted for minority discount and restrictions on the shares.
2. Submitting to SAV with supporting financial information (accounts, forecasts, cap table).
3. Negotiating with HMRC if they dispute the valuation — a process that can take four to twelve weeks.

Agreed valuations are valid for 90 days from HMRC's written agreement. Options must be granted within this window.

Restricted shares: If the shares to be issued on exercise carry restrictions (e.g., drag-along clauses, pre-emption rights, restrictions on transfer), these reduce the UMV. It is generally in the company's interest to argue for the lowest defensible valuation, reducing the exercise price employees need to pay.

Disqualifying Events

Certain events cause EMI options to lose their tax-advantaged status — they become "non-qualifying" from the date of the disqualifying event:

• Employee ceases to meet the working time commitment (falls below 25 hours/week or 75% of total working time).
• Company ceases to be a qualifying company (exceeds gross assets threshold, takes on an excluded activity, loses independence through acquisition).
• Company goes into administration or receivership.
• The option terms are varied in a way that is not permitted under the EMI legislation (e.g., changing the class of shares, increasing the option price in certain ways).

The consequence of a disqualifying event is that income tax and NIC become payable on exercise on the full spread (current market value minus exercise price) in the same way as a non-qualifying option. However, if the employee exercises within 90 days of the disqualifying event, the income tax charge is limited to any discount at grant — the more favourable treatment is preserved for that 90-day window.

This 90-day window is critical in M&A situations. When a company is being acquired, existing EMI options typically experience a disqualifying event (the company loses independence). Employees should exercise within 90 days to preserve the income tax exemption.

EMI vs CSOP: The Key Comparison

The Company Share Option Plan (CSOP) is the alternative approved scheme for companies that do not qualify for EMI (typically because they exceed the gross assets or employee count thresholds, or operate in an excluded sector).

Feature	EMI	CSOP
Company eligibility	Gross assets ≤£30m, <250 employees, qualifying trade	Broader — no size limit (from April 2023)
Individual limit	£250,000 UMV at grant	£60,000 UMV at grant
Income tax on exercise	None (if granted at UMV)	None (if exercise price ≥ market value at grant)
NIC on exercise	None	None
BADR qualifying period	2 years from grant	2 years from exercise (shares held)
HMRC valuation required	Yes	Yes (from April 2023)
Flexibility	High — bespoke terms	Moderate

CSOP underwent reforms in April 2023 (Finance Act 2023), removing the previous £30,000 limit per employee (increased to £60,000) and removing the "employee-only" share class restriction. These changes made CSOP significantly more attractive for larger companies. However, EMI remains superior for qualifying SMEs due to its higher individual limit and the more advantageous BADR clock running from grant.

Common Planning Considerations

Grant timing: Options should ideally be granted when the company's valuation is relatively low — for example, early in a funding round before a step-change in value. The lower the agreed UMV at grant, the more of the ultimate gain is treated as capital rather than income.

Option refresh after funding round: Following a new funding round that increases the company's value, existing option holders' remaining EMI allowance (up to £250,000 UMV) may be topped up by granting further options at the new, higher valuation.

Leavers who move to a different role: If a key employee becomes a non-executive director or consultant (reducing their hours below the threshold), the options disqualify. Consider whether to grant additional CSOP or unapproved options to cover this scenario.

International employees: EMI is a UK statutory scheme. Foreign-national employees based in the UK can participate. For employees who are mobile internationally and may cease to be UK tax resident, the treatment of options exercised as non-residents is complex — HMRC will tax the UK-source element (attributable to UK working days), and the employee's home country may impose its own tax. Tax equalisation policies and treaty relief should be considered.

Compliance Caveat

The EMI regime is subject to ongoing legislative change, including adjustments to BADR rates, scheme limits, and HMRC administrative processes. This guide reflects the position as at June 2026. Company valuations involve inherent judgment, and HMRC may challenge valuations on enquiry. Employers should retain documentation of the working-time commitment for each option holder throughout the life of the options. Legal and tax advice from specialists in employee equity is essential.

How Global Investments Can Help

Global Investments advises business owners on the design and implementation of EMI schemes, from initial eligibility assessment through HMRC valuation submissions and option agreement documentation. We also assist option holders — particularly internationally mobile executives — in understanding the cross-border tax implications of their equity awards. If your business is approaching the EMI eligibility thresholds, or if you are planning an exit that will trigger option exercises, our team can help you plan the timing and structure to optimise the outcome. Contact us for a confidential discussion.