Which events can disqualify EMI options?
📘 Overview
Enterprise Management Incentive (EMI) options provide generous tax advantages, but these can be lost if a “disqualifying event” occurs.
When an EMI option becomes disqualified, it no longer qualifies for full tax relief. However, in most cases, the tax benefits can be partially preserved if the option is exercised within 90 days of the disqualifying event.
This guide explains:
- What counts as a disqualifying event
- The tax impact of disqualification
- How to maintain relief where possible
⚠️ What Happens When an EMI Option Is Disqualified
If a disqualifying event occurs:
- Income tax relief is partially lost, and
- Capital gains tax (CGT) relief is fully lost.
If the employee exercises their options within 90 days of the disqualifying event, the tax benefits up to that date are preserved.
If the option is exercised after 90 days, the employee must pay income tax on the increase in share value between:
the date of the disqualifying event ➜ and ➜ the date of exercise.
🚫 Common Disqualifying Events
Disqualifying Event | Description / Example |
---|---|
Change of Control | The company is acquired and becomes a subsidiary of another entity. |
Non-Qualifying Trade | The company stops meeting the EMI trading activity rules, for example, a fintech company obtaining a banking licence (a non-qualifying activity). |
Employee No Longer Meets Working Time Requirement | The employee leaves the company or reduces their working hours below the EMI threshold (at least 25 hours per week or 75% of total working time). |
Variation of Option Terms | Any change to the option agreement, e.g. changing the vesting conditions, altering the exercise price, or increasing the number of options, can trigger disqualification. |
Share Conversion | The underlying shares are converted into a different class (for example, from ordinary to preference shares). |
Exceeding the Employee Limit | The employee is granted additional options that take the unexercised total above £250,000 in market value at the grant date. |
💡 Important Notes
- The company’s gross assets exceeding £30 million does not cause disqualification.
- Disqualification does not automatically cancel the option, it only affects the tax treatment.
- Some disqualifying events (like leaving employment) may already be covered by the option’s terms, such as “good leaver” or “bad leaver” provisions.
🕒 Exercising Within 90 Days
If an employee exercises their EMI options within 90 days of the disqualifying event:
- Income tax relief is maintained on the growth up to that date.
- Capital gains tax relief (via Business Asset Disposal Relief) is still available for qualifying shares.
If exercised after 90 days:
- Income tax applies on any increase in share value after the disqualifying event.
- Capital gains tax relief is lost entirely.
📎 Tip: Employees should be notified promptly if a disqualifying event occurs so they have time to decide whether to exercise their options within the 90-day window.
✅ Summary
Event Type | Disqualifying? | Action Required |
---|---|---|
Change of control | ✅ Yes | Exercise within 90 days to preserve tax relief |
Company stops qualifying trade | ✅ Yes | Review eligibility; consider early exercise |
Employee leaves / reduces hours | ✅ Yes | Check EMI working time conditions |
Option terms changed | ✅ Yes | Avoid altering exercise price or vesting terms |
Shares converted to another class | ✅ Yes | Seek advice before restructuring |
Employee’s total unexercised EMI options exceed £250,000 | ✅ Yes | No new EMI grants permitted above this limit |
Company’s gross assets exceed £30m | ❌ No | Still qualifies for EMI |