What happens if the company is sold before the options have been exercised?
📘 Overview
A takeover is often treated as a disqualifying event under EMI rules. This means the favourable tax treatment associated with EMI options may be lost unless employees take specific action, typically by exercising their options within 90 days.
However, the exact implications depend on the form of the takeover:
- If the company is bought for cash, the process is usually straightforward.
- If the takeover involves shares in the acquiring company, special EMI rules allow an exchange of options so employees can retain their tax benefits.
✅ Scenario 1: Cash Takeover (Sale for Money)
In a standard cash sale, the takeover itself is a disqualifying event. Employees will normally:
- Exercise their EMI options within 90 days of the sale.
- Sell their newly acquired shares to the acquiring company at the same time.
This simultaneous exercise and sale avoids administrative complications and ensures employees realise the value of their options immediately.
Tax treatment:
- The employee pays Capital Gains Tax (CGT) on the difference between:
- the sale proceeds received from the acquiring company, and
- the amount paid to exercise the option.
- Business Asset Disposal Relief (BADR, formerly Entrepreneur’s Relief) should apply if the qualifying conditions are met: the rate is 14 % for disposals on or after 6 April 2025, and will increase to 18 % for sales from 6 April 2026.
💡 Tip: Ensure all required conditions for BADR are met, particularly regarding share-ownership period and employment status, before exercising options.
✅ Scenario 2: Share-for-Share Takeover (Exchange of Options)
If the acquiring company offers shares instead of cash, EMI rules permit an exchange of options. This means the tax-advantaged status of the EMI options can be transferred to new “replacement options” over shares in the acquiring company.
To qualify, several conditions must be met:
📋 Replacement Option Conditions
Condition |
Requirement |
| Timing | Replacement options must be granted within six months of the takeover. |
| EMI eligibility | The new options must meet the usual EMI requirements, except that the acquiring company: (a) does not have to satisfy the gross-assets test, and (b) may have non-qualifying subsidiaries. |
| Unexercised options limit | After the takeover, the acquiring company must still meet the rule that unexercised EMI options cannot exceed £3 million in total value. |
| Equivalent value | The share values and amounts payable under both the old and new options must remain the same. |
If all these are satisfied, the replacement options are treated as if they were EMI options originally granted by the acquiring company, preserving their tax advantages.
💡 Key / Practical Points
- A takeover is normally a disqualifying event, but exercising within 90 days preserves EMI relief.
- BADR may reduce CGT to 14 % (on disposals from 6 April 2025) or 18 % (from 6 April 2026) if conditions are met.
- In a share exchange, replacement EMI options can carry forward tax benefits if all statutory conditions are satisfied.
- Always document the timing, valuation, and exchange terms carefully, HMRC may review these during compliance checks.
- Consider obtaining professional tax advice before completing any option exercise or exchange.
🔗 Useful HMRC Guidance
Summary
When a company with EMI options is sold, employees generally have two main paths:
- Exercise and sell their options during a cash takeover, paying CGT on the gain; or
- Exchange their EMI options for equivalent ones in the acquiring company, provided strict EMI rules are met.
Both routes can retain valuable tax benefits if handled correctly and within the required time limits.