EMI qualifying conditions
EMI is available only to companies that meet a set of conditions at the time of grant, and options can lose their tax-advantaged status if the company or employee later falls outside them. The company must be independent, not a subsidiary of another company, carry on a qualifying trade, and stay under the size limits, all of which sit alongside the mechanics covered on share options.
- Gross assets of 30 million pounds or less at the time of grant
- Fewer than 250 full time equivalent employees
- A qualifying trade, which excludes certain activities such as banking, property development, farming, legal and accountancy services, and other excluded activities listed by HMRC
- The company must not be under the control of another company and must not be a member of a partnership
- A permanent establishment in the UK is required
The excluded activities list is detailed and changes are possible. Always confirm current qualifying trade rules with an adviser before assuming a business qualifies. Companies that fail the trade test typically fall back to CSOP.
Individual and company limits
Each employee can hold unexercised EMI options over shares worth up to 250,000 pounds, measured at the date of each grant using the unrestricted market value at that time. Across the whole company, the total value of shares under unexercised EMI options cannot exceed 3 million pounds, and the resulting gain is taxed under the rules covered on equity tax.
| Limit | Amount | Measured how |
|---|---|---|
| Per employee | 250,000 pounds | Unrestricted market value at each grant date, aggregated across all live EMI options |
| Per company | 3 million pounds | Total value of shares under all unexercised EMI options |
For example, if a company grants an employee options over shares worth 100,000 pounds this year and another 100,000 pounds next year, that employee still has 50,000 pounds of headroom left under the 250,000 pound limit before hitting the cap.
Working time and eligibility
An employee must spend at least 25 hours a week, or if less, 75 percent of their working time, on duties for the company or a qualifying subsidiary. This is known as the working time requirement, and it generally rules out non-executive directors and part time consultants from receiving EMI options, though they may still receive unapproved options or CSOP where eligible.
- An employee cannot hold, together with associates, more than 30 percent of the company's ordinary share capital
- The employee must not have a material interest that breaches the 30 percent rule at the date of grant
- Options must be capable of exercise within 10 years of grant, after which they lose EMI tax treatment
HMRC valuation agreement and notification
Before granting EMI options, most companies apply to HMRC for an advance valuation of their shares, submitted through the valuation checking service known as VAL231. Agreeing a valuation in advance gives certainty that the strike price is set at or above unrestricted market value, which is what keeps the exercise tax free. HMRC valuations are typically valid for 90 days from agreement.
- Submit a VAL231 valuation request with company accounts, cap table and details of the proposed grant
- Once agreed, grant within 90 days of the valuation date, or request a fresh valuation
- Notify HMRC of the grant within 92 days using the ERS online service, missing this deadline disqualifies the option from EMI treatment
- Keep the valuation agreement on file, since it is the key evidence if HMRC later queries the tax treatment
A valuation agreement is not compulsory but is strongly recommended. Granting without one means the company is taking the risk that its own view of market value will hold up if challenged.
Sale and Business Asset Disposal Relief
When EMI shares are eventually sold, any gain since the grant date is subject to Capital Gains Tax rather than income tax, provided the option was exercised within 10 years and the strike was set at or above the agreed market value. EMI shares also benefit from relaxed rules for Business Asset Disposal Relief (BADR), which offers a reduced CGT rate on qualifying gains up to a lifetime limit.
For most other CGT reliefs an employee needs to have held 5 percent of the company for two years. For EMI shares, the option holding period counts towards the two years and the 5 percent shareholding test is waived, so an employee who exercises shortly before an exit can still often qualify for BADR if they held the option for at least two years.
BADR rates and lifetime limits are set by the government and have changed in recent years. Confirm the current rate and limit with an adviser before relying on a specific tax outcome.
EMI eligibility and deadline queries
- What happens if a company grows past the EMI size limits after granting options?
- Options already granted are generally unaffected, but the company cannot grant new EMI options once it fails the qualifying conditions. Existing option holders should check with an adviser if the company's status changes.
- Is HMRC valuation agreement compulsory?
- No, but most companies obtain one because it provides certainty on the strike price and protects the tax-advantaged status of the option if HMRC later reviews it.
- What is the 92 day notification deadline for?
- Every EMI grant must be notified to HMRC within 92 days through the ERS online service. Missing the deadline means the option cannot receive EMI tax treatment, even if every other condition was met.
- Can a non-employee consultant get EMI options?
- No. EMI requires the recipient to be an employee meeting the working time requirement, so consultants and non-executive directors are not eligible.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.