How are EMI options treated on a company sale?

EMI options are typically exercised immediately before the sale (accelerated exercise). The employees acquire the shares and sell them to the buyer. The gain is subject to CGT at 18% BADR if the 2-year holding period is met (the EMI option period counts towards the 2 years). When a company with EMI options is sold, the typical treatment is: (1) Accelerated exercise — the option agreement includes a provision for accelerated exercise on a sale. The employees exercise their options immediately before completion of the sale. (2) Share acquisition — the employees acquire the shares by paying the exercise price. No income tax or NIC is due on exercise (if the exercise price was at or above the market value at grant). (3) Sale — the employees immediately sell the shares to the buyer as part of the sale. (4) CGT and BADR — the gain (sale proceeds minus exercise price) is subject to CGT. If the employee has held the EMI option for at least 2 years before the disposal, the shares qualify for BADR at 18% (the EMI option holding period counts towards the 2-year requirement). (5) Disqualifying event — if the sale is to a non-qualifying company (e.g., a listed company), a disqualifying event occurs. If the options are exercised within 90 days of the disqualifying event, the EMI tax advantages are preserved. The accelerated exercise provision ensures the options are exercised within 90 days, preserving the EMI advantages. Relevant legislation: Schedule 5 ITEPA 2003, Paragraph 39 (disqualifying events); TCGA 1992, Section 169I (BADR for EMI shares). Example: An employee holds EMI options granted 3 years ago (exercise price £100,000, market value at grant £100,000). The company is sold for £500,000 per employee's shares. The employee exercises the options (accelerated exercise) and immediately sells the shares for £500,000. No income tax on exercise. CGT on £400,000 gain at 18% BADR = £72,000. The employee receives £460,000 after tax. Common mistake: Not including an accelerated exercise provision in the EMI option agreement. Without this provision, the options may not be exercisable on a sale, and the employees may miss out on the sale proceeds and BADR.

What is accelerated exercise of EMI options?

Accelerated exercise is a provision in the EMI option agreement that allows the options to be exercised immediately before a company sale. The employees acquire the shares and sell them to the buyer, qualifying for BADR at 18% if the 2-year holding period is met. Accelerated exercise is a standard provision in EMI option agreements that allows the options to be exercised immediately before a company sale. How it works: (1) Trigger — the option agreement specifies the events that trigger accelerated exercise, typically including a sale of the company, a change of control, or an IPO. (2) Exercise — when a trigger event occurs, the options are exercised automatically (or at the company's discretion). The employees pay the exercise price and acquire the shares. (3) Sale — the shares are immediately sold to the buyer as part of the sale transaction. (4) Tax — no income tax or NIC on exercise (if exercise price ≥ market value at grant). CGT at 18% BADR on the gain (if the 2-year holding period is met). (5) Disqualifying event — if the sale is a disqualifying event (e.g., sale to a listed company), the accelerated exercise ensures the options are exercised within 90 days, preserving the EMI tax advantages. The accelerated exercise provision is essential for ensuring that employees can participate in the sale proceeds and benefit from the 18% BADR rate. Without it, the options may lapse on a sale, and the employees may receive nothing. Relevant legislation: Schedule 5 ITEPA 2003, Paragraph 34 (exercise of EMI options); Paragraph 39 (disqualifying events). Example: An EMI option agreement includes an accelerated exercise provision: 'In the event of a sale of the company, all outstanding options shall be exercised immediately before completion.' When the company is sold, the options are exercised automatically, the employees acquire the shares, and the shares are sold to the buyer. The gain qualifies for BADR at 10%. Common mistake: Not including an accelerated exercise provision in the EMI option agreement. Without this provision, the options may lapse on a sale (if the agreement allows), and the employees may miss out on the sale proceeds.

Is a company sale a disqualifying event for EMI?

A sale to a non-qualifying company (e.g., a listed company) can be a disqualifying event for EMI. If a disqualifying event occurs, the EMI tax advantages may be partially lost if the options are not exercised within 90 days. A disqualifying event occurs when the conditions for EMI qualification cease to be met. A company sale can be a disqualifying event if: (1) The buyer is a non-qualifying company (e.g., a listed company or a company with gross assets exceeding £30 million). (2) The company ceases to be independent (becomes a subsidiary of a non-qualifying company). (3) The company ceases to be a qualifying trading company. Effect of a disqualifying event on a sale: (a) If the options are exercised within 90 days of the disqualifying event, the EMI tax advantages are generally preserved (no income tax on exercise, 18% BADR on disposal). (b) If the options are exercised after 90 days, the EMI tax advantages are partially lost — income tax may be due on the difference between the market value at exercise and the exercise price (capped at the market value at the disqualifying event). (c) The accelerated exercise provision in the option agreement ensures the options are exercised within 90 days, preserving the EMI advantages. To avoid the loss of EMI tax advantages on a sale, the option agreement should include an accelerated exercise provision that triggers on a disqualifying event, ensuring the options are exercised within 90 days. Relevant legislation: Schedule 5 ITEPA 2003, Paragraph 39 (disqualifying events); Paragraph 40 (tax treatment after disqualifying events). Example: An employee holds EMI options. The company is sold to a listed company (a disqualifying event). The accelerated exercise provision in the option agreement triggers, and the options are exercised within 90 days. The EMI tax advantages are preserved: no income tax on exercise, 18% BADR on disposal. If the options were exercised after 90 days, income tax would be due on the gain (capped at the market value at the disqualifying event). Common mistake: Not exercising EMI options within 90 days of a disqualifying event. After 90 days, the EMI tax advantages are partially lost, and income tax may be due on exercise.

Do I qualify for BADR if I exercise EMI options on a sale?

Yes, if you have held the EMI options for at least 2 years before the disposal. The EMI option holding period counts towards the 2-year BADR requirement. The gain on disposal is subject to CGT at 18% BADR. EMI shares automatically qualify for BADR at 18% on disposal, without needing to meet the 5% shareholding and officer conditions. The key requirement is the 2-year holding period: (1) Holding period — the 2-year period starts from the date of grant of the EMI option (not the date of exercise). This is more generous than for other shares, where the holding period starts from acquisition. (2) Disposal — the shares must be disposed of at least 2 years after the date of grant of the EMI option. (3) Accelerated exercise — on a sale, the options are exercised immediately before completion, and the shares are sold to the buyer. If the EMI option was granted at least 2 years before the sale, the 2-year holding period is met, and BADR at 10% applies. (4) BADR rate — the BADR rate for EMI shares is 10% before April 2025, increasing to 14% from April 2025 (subject to confirmation — EMI shares may retain the 10% rate until April 2026). (5) Lifetime limit — the £1 million lifetime limit applies to EMI shares and other BADR-qualifying disposals combined. If the EMI option was granted less than 2 years before the sale, the 2-year holding period is not met, and BADR is not available. The gain is subject to the standard CGT rate (24% for higher-rate taxpayers). Relevant legislation: TCGA 1992, Section 169I (BADR for EMI shares — 2-year holding period from option grant). Example: An employee is granted EMI options on 1 January 2024. The company is sold on 1 February 2026 (2 years and 1 month after the option grant). The 2-year holding period is met. The employee exercises the options (accelerated exercise) and sells the shares. The gain qualifies for BADR at 10%. If the sale had been in December 2025 (less than 2 years after grant), BADR would not be available, and the gain would be subject to CGT at 24%. Common mistake: Granting EMI options less than 2 years before a planned sale. If the 2-year holding period is not met, BADR is not available, and the gain is subject to the full CGT rate (24%).

How should I structure share schemes before a company sale?

Before a sale, review EMI documentation, ensure accelerated exercise provisions are in place, check the 2-year BADR holding period, update HMRC valuations, and ensure growth share hurdles are appropriate. Specialist advice is essential. Before a company sale, the share schemes should be reviewed and structured to maximise tax efficiency: (1) EMI documentation — ensure all EMI option agreements are properly documented, signed, and registered with HMRC. Missing or incorrect documentation can result in the loss of EMI tax advantages. (2) Accelerated exercise — ensure the EMI option agreements include accelerated exercise provisions that trigger on a sale or disqualifying event. This ensures the options can be exercised immediately before the sale, preserving the EMI advantages. (3) 2-year BADR holding period — check whether the EMI options were granted at least 2 years before the expected sale date. If not, consider whether the sale can be delayed to meet the 2-year period (which would reduce the CGT rate from 24% to 10%). (4) HMRC valuations — ensure the HMRC valuations (SSV or Advance Assurance) are up to date and reflect the current market value of the shares. The sale price may be significantly higher than the valuation at grant, and the HMRC valuation is important for confirming the EMI qualification. (5) Growth share hurdles — if the company has growth shares, review the hurdle to ensure it is appropriate for the sale price. If the hurdle is below the sale price, the growth shares have value, and the employees will receive sale proceeds. (6) Buyer compatibility — ensure the share schemes are compatible with the buyer's requirements. Some buyers may require the cancellation of existing options or the rollout of new schemes. (7) Employee communication — communicate with employees about the treatment of their options on the sale, including the exercise process, tax implications, and expected proceeds. Specialist advice from a tax adviser and lawyer is essential before a sale. Relevant legislation: Schedule 5 ITEPA 2003 (EMI rules); TCGA 1992, Section 169I (BADR); Companies Act 2006 (share dealings on a sale). Example: A company is planning to sell in 12 months. It reviews its EMI schemes: all option agreements are properly documented and include accelerated exercise provisions. The options were granted 3 years ago, so the 2-year BADR holding period is met. The HMRC valuation (Advance Assurance) is 2 years old, so a new valuation is obtained. The growth share hurdle (£5 million) is below the expected sale price (£10 million), so the growth shares will have value. The schemes are structured correctly for the sale. Common mistake: Not reviewing the share schemes until the sale is imminent. Some issues (e.g., missing accelerated exercise provisions, 2-year BADR holding period not met) cannot be fixed at the last minute and can result in significant tax inefficiency.

Share Schemes › Planning

Share Schemes on a Company Exit

When a company is sold, the tax treatment of share schemes is critical. Understand EMI on exit, BADR, accelerated exercise, and how to structure schemes before a sale.

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When a company is sold, the tax treatment of employee share schemes can significantly affect the proceeds received by employees. Understanding how EMI options, growth shares, and other schemes are treated on exit is essential for both the company and the employees. Proper planning before a sale can maximise the tax efficiency of the scheme and ensure that employees benefit from the 18% BADR rate.

EMI Options on Exit

When a company with EMI options is sold, the options are typically exercised immediately before the sale (accelerated exercise). The employees acquire the shares and then sell them, qualifying for BADR at 18% if the 2-year holding period is met. The EMI option holding period counts towards the 2-year BADR requirement, so employees who have held EMI options for 2+ years before the sale qualify for the 10% rate.

Accelerated Exercise

In a sale, EMI options are typically exercised immediately before completion (accelerated exercise). The option agreement should include a provision for accelerated exercise on a sale. The employees exercise their options, acquire the shares, and immediately sell them to the buyer. The gain (sale proceeds minus exercise price) is subject to CGT at 18% BADR (if the 2-year holding period is met).

Disqualifying Events on Exit

A company sale can be a disqualifying event for EMI (if the buyer is a non-qualifying company, e.g., a listed company). If a disqualifying event occurs, the EMI tax advantages may be partially lost if the options are not exercised within 90 days. The option agreement should include provisions for accelerated exercise on a disqualifying event to preserve the EMI tax advantages.

Pre-Exit Planning

Before a sale, the company should review its share schemes to ensure: (1) EMI options are properly documented and registered. (2) The option agreement includes accelerated exercise provisions. (3) The 2-year BADR holding period is considered (options granted less than 2 years before the sale may not qualify for BADR). (4) HMRC valuations are up to date. (5) Growth share hurdles are appropriate for the sale price. (6) The scheme is compatible with the buyer's requirements. Specialist advice is essential before a sale to ensure the share schemes are structured correctly.

Key Points

What You Need to Know

EMI options are typically exercised immediately before a sale (accelerated exercise)
BADR at 10% applies if the 2-year holding period is met (EMI option period counts)
A company sale can be a disqualifying event for EMI — exercise within 90 days
Option agreements should include accelerated exercise provisions
Pre-exit planning is essential to maximise tax efficiency

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EMI Eligibility & Qualifying Companies EMI Tax Advantages Company Share Option Plan (CSOP)Growth Shares Business Asset Disposal Relief (BADR)Share Schemes on Exit Save As You Earn (SAYE / Sharesave)Unapproved Options & RSUs Share Incentive Plan (SIP)Employee Ownership Trusts (EOTs)Share Valuation for EMI & CSOP HMRC EMI Notification & Reporting Phantom Shares & Cash-Settled Awards Share Schemes on IPO

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