EMI due diligence is transaction archaeology

At some point, every self-respecting share plan, incentives and/or tax practice has to write and publicise something along the lines of: “All the things that can go wrong with EMI options.” Indeed, I once wrote about the tragedy and triumph of EMI options which you can read here. Well, here's another contribution to that venerable tradition, hopefully with some new insights.

EMI can look straightforward when the options are granted. The company qualifies, the employee qualifies, a valuation is agreed, and the documents are signed.

Five years later, someone offers £100 million for the business. The option agreements are still there, but the company has raised money, reorganised its group, changed its share rights and agreed new arrangements with employees.

Establishing whether the company qualifies for EMI today will not tell you how those options should be taxed. That requires a different enquiry: did each option qualify when it was granted and what has happened to it since?

EMI tax treatment is path-dependent. A transaction can bring together records that have never previously been examined as a single history. Reconstructing that history is closer to archaeology than checking that the right documents exist: working through the layers (of the type below) to identify where the analysis changed.

Grant → valuation → notification → financing rounds → employee changes → reorganisations → share capital changes → option amendments → transaction

And it really matters because an “EMI problem” does not have one tax consequence. In practice, the diligence often resolves into four different tax states:

Never qualified → partly qualified → subsequently disqualified → still qualifying but transaction mechanics fail

Those are not different descriptions of the same problem. An option that never qualified may have been exposed to the ordinary employment-related securities rules from the outset. An option may instead have qualified only in part because a statutory limit was exceeded. A valid EMI option can later suffer a disqualifying event, potentially preserving the treatment of earlier growth while exposing later growth to income tax. And an option can remain perfectly valid for EMI purposes but still fail to exercise, roll over or settle in the way the transaction assumes. 

The first task is therefore not simply to decide whether an option is “EMI”. It is to identify which state it is in, when that happened and what part of the economics is affected. 

Five areas deserve particular attention.

1. Applying today’s rules to yesterday’s options

The 2026 EMI reforms make the date analysis particularly important. For most companies, options granted from 6 April 2026 benefit from a £120 million gross-assets limit and fewer than 500 full-time equivalent employees. The company limit also increased from £3 million to £6 million, measured by the total unrestricted market value of shares under unexercised qualifying EMI options.

Different limits continue to apply where the relevant employer is a specified Northern Ireland company. The higher thresholds do not retrospectively validate a grant that exceeded the applicable limit in 2025. In particular, the £3 million company limit continues to apply to options granted before 6 April 2026.

Older grants therefore need to be tested against the facts and legislation applicable to them: independence, qualifying activities, employee eligibility, option terms, the relevant financial limits and notification. Even the notification timetable has changed. Grants before 6 April 2024 generally had a 92-day deadline. Grants from that date must generally be notified by 6 July following the end of the relevant tax year.

The 15-year qualifying exercise period works differently. For companies entitled to the extended period, existing options which have not already lapsed, expired or been exercised can potentially be amended to extend their lapse date or exercise period to take advantage of it. The option must be exercised on or after 6 April 2026. The legislation does not simply rewrite every contractual expiry date and fixed-date options require particular care because specific statutory machinery governs how their exercise date can be extended. You can read more about our thoughts on 15-year EMI options here.

The exercise is therefore not just to find the checklist that applied when the option was granted. It is to identify which historic rules continue to govern the option and which later changes can reach back into it.

2. The valuation looked fine, until someone remembered the financing round

Suppose options were granted over shares valued at £1. Three years later, the company is being sold for £20 a share. That increase does not establish that the original valuation was wrong, but the contemporaneous evidence might.

Was a financing already being negotiated? Had investors agreed heads of terms? Was there a recent secondary transaction or an offer for the business? What information was supplied to the valuer and HMRC?

An HMRC-agreed EMI valuation is normally valid for 90 days. But the diligence exercise should go beyond finding the valuation agreement: the submission needs to be reconciled with what was actually happening around the grant. Nor does an investor’s subscription price automatically establish the value of employee shares. Preference rights, class differences and other economic terms may justify a substantial difference. The task is to understand the financing and reconcile it with the valuation, not substitute one headline number for another.

There is also an important distinction hidden inside the expression “the EMI valuation”. Restricted shares may have both an actual market value, or AMV, and an unrestricted market value, or UMV. AMV is relevant to whether an option has been granted at a discount. UMV is relevant to the £250,000 individual limit and the company-wide EMI limit. An understated AMV can therefore mean that an apparently market-value option was actually discounted, creating an employment income charge on exercise. An understated UMV creates a different risk: that the individual or company EMI limits were exceeded.

The historic valuation can affect both whether the option qualified and how the eventual return is divided between employment income and capital gain.

3. Something happened in year three

A valid EMI option can be affected by later events: loss of independence, changes to qualifying activities, cessation of employee eligibility, certain amendments to the option, alterations of share capital or conversion of shares. Not every corporate or employee change is disqualifying. Growing beyond the gross-assets or employee thresholds after grant does not, by itself, disqualify an existing option. A financing round or reorganisation is therefore a reason to investigate, not a conclusion.

Where a disqualifying event has occurred, its date matters. Exercise within 90 days generally preserves the existing EMI tax advantages. Beyond that period, for a market-value option, the growth after the event is broadly exposed to income tax and, where the shares are readily convertible assets, NIC.

Suppose the shares were worth £1 at grant, with a £1 exercise price, £5 immediately before the disqualifying event and £25 when exercised and sold on exit more than 90 days later. The economic gain is £24 a share. Broadly, £20 falls into the employment income calculation. The £4 of growth before the disqualifying event remains within the capital gains calculation.

That can materially change both the employee’s net proceeds and the employer’s exposure. It may also create a new valuation problem: establishing the share value immediately before an event that received little attention at the time. This is why simply recording that an option “lost EMI status” is not enough. You need to know when, why and what part of the economic return is affected.

4. The transaction fix creates a new problem

Transactions create pressure for practical adjustments: accelerate vesting, waive a performance condition, extend an exercise window or amend the shares so that management receives the intended sale proceeds. Those actions do not all have the same consequences.

HMRC distinguishes between conditions affecting the extent of vesting and the fundamental terms of the option: the number of shares, the exercise price and when the shares can be acquired. A minor change may be acceptable. HMRC expressly gives the example of allowing an exit-only option to be exercised immediately before, and conditional upon, the specified exit. A more than de minimis improvement to a fundamental term can instead amount to release of the original option and grant of a new one. Other variations may constitute a disqualifying event without creating a new option. 

That distinction matters enormously on a transaction. Suppose an amendment is made five weeks before completion. If it creates a disqualifying event and the existing option is exercised within 90 days, the EMI tax advantages may still be preserved. If the amendment instead amounts to release and regrant, the 90-day rule does not rescue the original grant. The new option has to be analysed afresh. 

So “the amendment might affect EMI” is not a sufficient answer. The deal team needs to know what the amendment does legally, which tax mechanism it engages and what can safely happen next. The share plan workstream therefore cannot simply receive the transaction mechanics once somebody else has designed them. It needs to help design them.

5. The options do not exercise when the model assumes

A transaction model may assume that options will be exercised immediately before completion.
The option agreement may say something else. An EMI option must state when and how it may be exercised. An unlimited board discretion to decide the exercise circumstances after grant is not an adequate substitute.

Signing, court sanction, a change of control and completion are different events. A definition designed for a conventional share sale may not accommodate a scheme of arrangement. Exercise notices, payment arrangements and conditionality also need to work in practice.

There is though some flexibility. As noted above, HMRC accepts a de minimis amendment allowing an exit option to be exercised immediately before, and conditional upon, the specified exit. But that does not allow the parties simply to invent whatever exercise right the transaction requires. Rollover brings another regime into play. A qualifying replacement option must satisfy specific requirements around value, exercise price, the acquiring company, employee eligibility and timing. It is treated as having the original option’s grant date, but that continuity depends on the statutory conditions being met.

Finally, the proceeds model needs to reflect the tax analysis. Where exercise produces employment income on readily convertible shares, PAYE and NIC may need to be funded and accounted for as part of completion.

Tax treatment and deal mechanics ultimately have to meet in the same spreadsheet.

Run the archaeology before the sale process

The useful output from EMI diligence is not simply a red, amber or green conclusion. It is an evidenced history for each grant: whether it qualified originally, whether it qualified only in part, whether something subsequently changed its treatment, whether the option still works mechanically for the proposed transaction, what part of the gain is affected and what needs to happen next.

Missing evidence should also be distinguished from an established defect. A buyer may price uncertainty even where nobody has demonstrated that EMI relief has actually been lost. Starting before the formal sale process gives the company time to retrieve records, reconstruct valuations, analyse possible remedies and decide how genuine liabilities will be dealt with. It also reduces the temptation to make hurried amendments whose consequences have not been worked through.

That is the real value of the archaeology. It turns a label - “EMI option” - into something much more useful: a reliable view of which of the four states each grant occupies, what the employee will receive, what the company may have to account for and whether the transaction mechanics can actually deliver it.

At Burges Salmon, we help companies review EMI arrangements from grant through to exit, bringing together eligibility, valuation, employment tax and transaction mechanics.