How EMI Share Options Are Taxed When a Company Is Sold
Enterprise Management Incentive options give employees of qualifying companies the right to buy shares on favourable tax terms. Where the exercise price is at least the market value at grant, there is normally no income tax or National Insurance on exercise, and the gain on sale can qualify for Business Asset Disposal Relief at 18% for 2026/27.
EMI is the most widely used tax-advantaged share option scheme for growing UK companies. For senior people in a business that is approaching a sale, the options can become one of the largest assets they hold, and the tax treatment on exit has a direct effect on what they keep.
The rules changed on 6 April 2026, when the limits on the size of company able to grant EMI options were raised considerably. Larger scale-ups can now use the scheme, so more employees hold EMI options than before.
This article explains how EMI options are taxed at exercise and on a sale, the conditions for Business Asset Disposal Relief, the effect of a disqualifying event, and the points that tend to arise when a company is sold.
In this article
Quick Summary
This may help you:
- You hold EMI options in a company that may be sold or listed
- You have been offered EMI options and want to understand the tax
- Your options could be worth a substantial sum on exit
- You want to know how Business Asset Disposal Relief applies to EMI shares
Worth understanding:
- Options granted at market value normally carry no income tax on exercise
- The two-year period for the relief runs from the grant date
- The usual 5% shareholding test does not apply to EMI shares
- Business Asset Disposal Relief has a £1 million lifetime limit
Part of the Income Over £100k series
- The £100k Tax Trap Explained
- How Bonuses Can Push Income Above £100k
- How Restricted Stock Units Are Taxed
- EMI Share Options Explained
How EMI options work
An EMI option is a right to buy shares in your employer at a fixed price at a future date. The company has to meet conditions on its size, its independence and the trade it carries on, and the employee has to meet conditions on their working commitment. The company notifies HMRC of the grant by 6 July following the end of the tax year in which the options were granted.
Many companies use exit-only options, which can be exercised only when the company is sold. Others allow exercise once the options have vested. The option agreement sets out which applies, and its terms matter as much as the tax rules. HMRC's guidance on Business Asset Disposal Relief explains how the relief applies to shares acquired through EMI options.
The limits for 2026/27
For options granted from 6 April 2026, HMRC's guidance sets these limits:
- an individual employee can hold qualifying options over shares worth up to £250,000, valued at the date of grant
- the company can have options over shares worth up to £6 million in total
- the company's gross assets must not exceed £120 million
- the company must have fewer than 500 employees
- new options can have an exercise period of up to 15 years
The company limits were lower before 6 April 2026, and options granted before then stay subject to the company limit that applied when they were granted. The increases do not apply to a small category of specified companies, which keep the earlier limits.
Tax on exercise
Where the exercise price is at least equal to the market value of the shares on the day the option was granted, there is normally no income tax or National Insurance when the option is exercised. This is the main advantage EMI has over unapproved options, and it is the reason companies usually agree a valuation with HMRC before granting.
Where the option was granted at a discount, income tax is charged on exercise. The charge applies to the lower of the discount at grant and the difference between the market value at exercise and the price paid. Our article on how restricted stock units are taxed explains how a different type of share award is treated.
Tax when the shares are sold
A sale of the shares is a disposal for capital gains tax, and the gain is broadly the sale proceeds less the amount paid for the shares. For 2026/27, capital gains tax is charged at 18% and 24%, with an annual exempt amount of £3,000, as our article on capital gains tax explains.
EMI shares have an advantage over most other shareholdings here. They can qualify for Business Asset Disposal Relief if the option was granted at least two years before the shares are sold, and the usual requirement to hold at least 5% of the company does not apply. Where the relief is available, qualifying gains on disposals from 6 April 2026 are taxed at 18%, up to a lifetime limit of £1 million of gains. Our article on Business Asset Disposal Relief covers the wider conditions.
Disqualifying events
Some events bring the EMI tax advantages to an end, for example the company ceasing to meet the independence conditions or the employee ceasing to meet the working requirements. HMRC's guidance confirms that the tax advantages are preserved if the option is exercised within 90 days of a disqualifying event. After that, part of any increase in value can be taxed as income. A sale of the company can itself be a disqualifying event, which is why the timing of exercise is closely tied to the timetable of a deal.
Points that often arise on a sale
Three questions come up repeatedly when a company with EMI options is sold. The first is timing: the two years needed for Business Asset Disposal Relief are measured from the date the option was granted, so the grant date recorded with HMRC matters. The second is the lifetime limit, which is shared across every qualifying disposal a person makes, including any earlier business sales. The third is what happens to the proceeds, because a sale can turn an illiquid option into a large cash sum within a single tax year. Our article on the £100k tax trap explains how a jump in income affects the personal allowance.
People in this position often take regulated financial advice, alongside specialist tax advice, well before a transaction completes.
External references
GOV.UK: Business Asset Disposal Relief, gov.uk/business-asset-disposal-relief
Key Considerations
| Factor | Why It Matters |
|---|---|
| Exercise price | Options granted at market value normally carry no income tax or NIC on exercise |
| Grant date | Business Asset Disposal Relief needs at least two years between grant and sale |
| 5% test | Does not apply to EMI shares, unlike most Business Asset Disposal Relief claims |
| Lifetime limit | Business Asset Disposal Relief applies to £1 million of qualifying gains over a lifetime |
| Disqualifying events | Exercise within 90 days preserves the tax advantages |
| Company limits | For options granted from 6 April 2026: £6 million in total, £120 million gross assets, fewer than 500 employees |
| Sale timetable | A sale can itself be a disqualifying event |
Frequently Asked Questions
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Financial planning decisions depend on individual circumstances. If you would like clarity on how the topics discussed may apply to your situation, TrustEvo can connect you with a regulated financial adviser.
This article is provided for general information only and does not constitute financial advice. Tax treatment depends on individual circumstances and may be subject to change. Regulated financial advice may be appropriate.