EMI share options: aftercare

Writing for UK200Group TaxTalk, BKL tax adviser Stephen Deutsch examines Enterprise Management Incentive share options and how to protect their tax effectiveness in the years between grant and exercise. 


If you are like me, once you have bought an item of new equipment, be it a DVD recorder, an electric drill or an ipad mini and feel that glow of satisfaction in getting it to work, you will not bother to look at the care instructions until and unless there’s a problem.  In contrast to the attentiveness and diligence that is invested in setting up an EMI Share Option arrangement it is surprising how often little or no care is taken to protect the tax effectiveness of the share options in the years between grant and exercise.

It’s well known that an employee’s share options will cease to be within EMI if he or she leaves or ceases to work the required number of hours per week.  These are 25 hours, or if less, for 75% of total working time.

But there are also conditions that will impact adversely on the company’s EMI arrangement and once these EMI conditions are broken the option arrangement cannot be fixed and all unexercised EMI options will have lost their tax-advantaged status.

  1. The company ceases to meet the trading activities requirement.In the case of a single company, the company must exist wholly for the purpose of carrying on a qualifying trade.Although it can hold and manage property used for its trade, if, for example, it invests monies into any asset that is not used for its trade or receives equity in lieu of fees which it holds as an investment, the company will cease to qualify.
    In contrast, so long as a group of companies has at least one group company that exists wholly for the purpose of carrying on a qualifying trade, it will continue to qualify for EMI so long as the business of the group does not consist wholly or substantially in carrying in excluded or non-trade activities.
  2. The company fails the ‘independence’ requirement by becoming (a) a 51% subsidiary of another company or (b) falls under the control of another company without being a 51% subsidiary.An example of (b) might be where an EMI company has a corporate shareholder, A Limited, that holds 40% of its shares and individual shareholders with the remaining 60% one of which, a 5% shareholder (X), is also the controlling shareholder of A Limited.That company will satisfy the EMI ‘independence’ requirement.
    It will fail the requirement if, for example, X (or A Limited) acquires a further 6% of the shares of the EMI company so that A limited together with X is able to conduct the affairs of the EMI company according to its wishes by virtue of having more than 50% of the shares.
  3. There is a conversion of any shares into a different class of shares.For example, the company wish to demerge one of its trades, perhaps by means of a tax-exempt distribution demerger.In order to facilitate this its ordinary shares over which EMI options have been granted, will be re-classified as A Ordinary shares that represent the trade to be retained and B Ordinary shares representing the trade to be demerged.The conversion of its ordinary shares may be an EMI ‘disqualifying event’.
  4. There is a variation in the terms of the share option which will have the effect of increasing the market value of the shares over which options have been granted or alters the rights attaching to any shares in the company and where the effect of the alteration is to increase the market value of the shares. This is subject to the proviso that the alteration is not made for commercial reasons or its main purpose (or one of its main purposes) is not to increase the market value of the option shares.

Fortunately, the legislation that deals with ‘EMI Disqualifying Events’ (ITEPA 2003 s532 – 538) provides a period of 90 days immediately following the ‘disqualifying event’ in which the tax advantages of EMI are preserved. Subject to the option agreement permitting exercise in these circumstances, the employee can exercise his or her options as if the options remained with the EMI arrangement.

Keep in mind the ITEPA User Care Instructions.


This article is also available via the UK200Group website.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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