Which events can disqualify EMI options?

📘 Overview

Certain events can cause an Enterprise Management Incentive (EMI) option to become disqualified. In many cases, you can preserve most of the tax advantages if the option is exercised within 90 days of the disqualifying event.

🔍 What “disqualification” means

When an EMI option is disqualified:

• There is a partial loss of income tax relief.
• There is a total loss of capital gains tax (CGT) relief on gains after the event if exercise happens more than 90 days later. In that case, income tax applies to the post-event gain (the increase in value from immediately before the event to the date of exercise).

✅ Disqualifying events (HMRC list)

The following count as disqualifying events under HMRC rules:

• Loss of independence (company control changes): The company comes under the control of another company and becomes a subsidiary. A qualifying replacement option may be available on certain reorganisations.
• Non-qualifying trade: The company stops meeting the trading activities requirement (for example, moves into excluded activities to a substantial extent).
• Employment/working time failure: The employee stops meeting the working time requirement (generally 25 hours per week or, if less, 75% of working time).
• Variation of option terms that increases value or breaks Schedule 5 conditions: Changes to option terms that increase the value of shares under option or mean the option no longer meets EMI conditions. Examples include changing exercise terms or repricing in a way that increases value.
• Certain share capital changes: Alterations to share capital that affect value and mean Schedule 5 requirements would no longer be met.
• Share class conversion affecting only some shares: Converting the shares under option into a different class where the change is not applied to the whole class of shares.
• Combined EMI + CSOP limit exceeded due to a new CSOP grant: If the employee is granted a CSOP option that takes their combined unexercised EMI and CSOP options over £250,000 (UMV at grant), this is a disqualifying event.
• No qualifying trade commenced within two years: The company has not started to carry on a qualifying trade within two years of the EMI grant (or preparations have ceased).

🧭 Points of clarification (commonly misunderstood)

• Granting further EMI options and the £250,000 individual limit: The £250,000 cap applies at grant. If a new EMI grant would exceed the cap, the excess simply does not qualify for EMI tax advantages; it does not disqualify prior qualifying EMI options. A three-year rule also restricts further EMI qualifying grants once an individual has reached the cap.
• Gross assets threshold (£30 million): The gross assets test applies at the date of grant. Exceeding £30 million after grant is not listed by HMRC as a disqualifying event; the disqualifying-event categories above do not include it.

💡 Tax effect if you miss the 90-day window

If you exercise more than 90 days after a disqualifying event, the post-event gain is charged to income tax (and possibly NICs if the shares are readily convertible assets). CGT relief (including Business Asset Disposal Relief) is restricted accordingly.

Key points

• You can often preserve favourable treatment by exercising within 90 days of the event.
• HMRC recognises specific disqualifying events (see list above). Check reorganisations, working time, option variations, and share capital changes carefully.
• The £250,000 limit is tested at grant. Excess EMI over the cap is non-qualifying rather than disqualifying; a CSOP grant that pushes the combined total over £250,000 is specifically treated as a disqualifying event.
• The £30 million gross assets test is a grant-date condition, not a post-grant disqualifying trigger.