How does HMRC value shares for EMI and CSOP?

HMRC's Shares and Assets Valuation (SAV) team values shares based on the 'open market value' — the price in an arm's length transaction. For private companies, they consider company financials, comparables, discounts (minority and marketability), and special factors like recent funding rounds. HMRC's Shares and Assets Valuation (SAV) team is responsible for valuing shares for tax purposes, including EMI and CSOP. The valuation is based on the 'open market value' — the price that the shares would fetch in an arm's length transaction between a willing buyer and a willing seller. For private companies, the valuation considers: (1) Company financials — revenue, profits (EBITDA), assets, and cash. HMRC looks at historical financials and projections. (2) Comparables — valuations of similar companies (public or private) in the same industry. HMRC looks at price-to-earnings (P/E) ratios, EV/EBITDA multiples, and other valuation metrics. (3) Discounts — (a) Minority discount: a discount for non-controlling shareholdings (typically 10-30%). (b) Lack of marketability discount: a discount for the shares not being listed on a stock exchange (typically 10-30%, depending on the company's size and prospects). (4) Special factors — recent funding rounds (which may indicate the market value), arm's length transactions in the shares, and any special rights attaching to the shares (e.g., preference shares, growth shares with hurdles). (5) Methods — HMRC typically uses the earnings method (capitalising maintainable earnings at an appropriate P/E ratio), the asset method (net asset value), or the dividend yield method, depending on the company's nature. The valuation can be complex, and specialist advice from a qualified valuer is recommended. Relevant legislation: ITEPA 2003, Part 7 (employment-related securities — market value); TCGA 1992, Section 272 (open market value); HMRC Shares and Assets Valuation Manual. Example: A private technology company with £2 million revenue and £500,000 EBITDA is granting EMI options. A professional valuer assesses the company at an EV/EBITDA multiple of 10x (based on comparable listed companies), giving an enterprise value of £5 million. After adjusting for cash and debt, the equity value is £6 million. With 1 million shares in issue, the value per share is £6. The valuer applies a minority discount of 20% and a marketability discount of 15%, giving a final value of approximately £4 per share. Common mistake: Using the company's most recent funding round as the definitive market value. Funding rounds may involve special rights (e.g., preference shares) that make the price higher than the value of ordinary shares. The valuation should be adjusted for the different share classes.

What is EMI Advance Assurance?

Advance Assurance is a written agreement from HMRC confirming the market value of shares for EMI purposes. The company submits a valuation before granting options, and if HMRC agrees, the valuation is binding for 120 days. This provides certainty before granting EMI options. EMI Advance Assurance is a process that allows a company to obtain certainty on the market value of its shares before granting EMI options. How it works: (1) Submission — the company submits a valuation to HMRC's Shares and Assets Valuation (SAV) team, along with supporting evidence (financial statements, comparables, funding round details, and the valuation methodology). (2) Review — HMRC reviews the valuation and either agrees or proposes a different value. The review can take 4-8 weeks (or longer for complex cases). (3) Agreement — if HMRC agrees with the valuation, they issue an Advance Assurance letter, confirming the market value for EMI purposes. (4) Binding — the Advance Assurance is binding on HMRC for 120 days from the date of the letter. If the company grants EMI options at the agreed value within 120 days, the valuation cannot be challenged by HMRC. (5) Scope — the Advance Assurance covers the market value of the shares at the date of the letter. It does not cover the EMI qualifying company conditions (which must be assessed separately). (6) Cost — there is no fee for Advance Assurance. (7) Not mandatory — Advance Assurance is not mandatory, but it is strongly recommended, as it provides certainty and prevents HMRC from challenging the valuation later. Without Advance Assurance, HMRC can challenge the valuation during an enquiry, potentially resulting in the loss of EMI tax advantages. Relevant legislation: Schedule 5 ITEPA 2003, Paragraph 32 (Advance Assurance for EMI); HMRC Employee Tax Advantaged Share Scheme User Manual (EMI valuation). Example: A company submits a valuation of £4 per share to HMRC for EMI Advance Assurance. After reviewing the evidence, HMRC agrees and issues an Advance Assurance letter. The company grants EMI options at £4 per share within 120 days. The valuation is binding — HMRC cannot challenge the £4 per share value for EMI purposes. If the company had not obtained Advance Assurance and granted options at £4 per share, HMRC could later argue that the market value was £6 per share, potentially disqualifying the options or triggering income tax. Common mistake: Not obtaining Advance Assurance before granting EMI options. Without it, HMRC can challenge the valuation during an enquiry, potentially resulting in the loss of EMI tax advantages and unexpected tax charges for employees.

How do I get a share valuation for CSOP?

CSOP does not have an Advance Assurance process. The company self-assesses the market value at grant and reports it to HMRC. To obtain certainty, the company can request a post-transaction valuation check (PTVC) from HMRC after granting the options. Unlike EMI, CSOP does not have an Advance Assurance process. The company self-assesses the market value of the shares at the date of grant and reports it on the CSOP notification to HMRC. To obtain certainty on the valuation: (1) Professional valuation — engage a qualified valuer to prepare the valuation and supporting evidence. The valuer should consider the same factors as HMRC (financials, comparables, discounts, special factors). (2) Documentation — keep detailed records of the valuation methodology, comparables, and assumptions. This documentation will be needed if HMRC challenges the valuation during an enquiry. (3) Post-transaction valuation check (PTVC) — after granting the CSOP options, the company can submit a PTVC to HMRC's SAV team. The PTVC process is similar to Advance Assurance but occurs after the grant. HMRC reviews the valuation and either agrees or proposes a different value. If agreed, the valuation is binding. (4) Timeline — the PTVC should be submitted as soon as possible after the grant (ideally within 3 months). HMRC may take 4-8 weeks to review. (5) Risk — without a PTVC, the company bears the risk that HMRC may challenge the valuation during an enquiry. If HMRC determines that the market value was higher than reported, the CSOP options may be disqualified (if the value exceeds the £60,000 limit) or the exercise price may be below market value (triggering income tax on exercise). Specialist valuation advice is recommended for CSOP grants. Relevant legislation: Schedule 4 ITEPA 2003, Paragraph 9 (market value for CSOP); HMRC Employee Tax Advantaged Share Scheme User Manual (CSOP valuation). Example: A company grants CSOP options over shares it values at £10 per share. It engages a professional valuer who confirms the value, and submits a PTVC to HMRC. HMRC reviews the valuation and agrees £10 per share. The valuation is binding, and the company has certainty that the CSOP options are correctly valued. Common mistake: Not obtaining a professional valuation for CSOP grants. The company self-assesses the market value, and without professional support, the valuation may be challenged by HMRC, potentially resulting in the loss of CSOP tax advantages.

What happens if HMRC disagrees with my share valuation?

If HMRC disagrees with the valuation, they may increase it, potentially disqualifying EMI/CSOP options or triggering income tax on exercise. The company can negotiate with HMRC, provide additional evidence, or appeal to the Tribunal if necessary. If HMRC disagrees with the share valuation used for EMI or CSOP, the consequences can be significant: (1) Increased valuation — HMRC may determine that the market value is higher than reported. This can affect: (a) The EMI individual limit — if the increased value causes the employee's total EMI option value to exceed £3 million, the excess is not a qualifying EMI option. (b) The CSOP limit — if the increased value causes the employee's total CSOP option value to exceed £60,000, the excess is not a qualifying CSOP option. (c) Exercise price below market value — if the exercise price was set at the (incorrectly low) market value, the exercise price is below the true market value, triggering income tax on exercise on the difference. (2) Negotiation — the company can negotiate with HMRC's SAV team, providing additional evidence (e.g., updated comparables, revised financials, expert reports). The negotiation process can take several months. (3) Appeal — if the company cannot reach an agreement with HMRC, it can appeal to the First-tier Tribunal. The Tribunal will review the valuation and make a determination. (4) Loss of tax advantages — if the increased valuation results in the options being disqualified (above the limit) or triggering income tax on exercise, the employees may face significant tax charges. The company may also face penalties for incorrect reporting. To minimise the risk, companies should: (a) obtain Advance Assurance for EMI, (b) obtain a professional valuation for CSOP, (c) document the valuation thoroughly, and (d) engage a specialist adviser to manage the valuation process. Relevant legislation: ITEPA 2003, Part 7 (employment-related securities — valuation disputes); TMA 1970 (enquiry and appeal provisions); HMRC Shares and Assets Valuation Manual. Example: A company grants EMI options at £4 per share (based on a self-assessed valuation). During an enquiry, HMRC determines that the market value is £6 per share. If the employee's total EMI option value at £6 per share exceeds £3 million, the excess is not a qualifying EMI option. If the exercise price was £4 (below the true market value of £6), income tax is due on the £2 per share difference on exercise. The company can negotiate with HMRC, providing additional evidence to support the £4 valuation. Common mistake: Not documenting the valuation methodology and evidence. Without proper documentation, the company may not be able to defend its valuation if HMRC challenges it during an enquiry.

How often should I update my share valuation?

The share valuation should be reviewed annually, or whenever there is a significant change in the company's circumstances (e.g., a new funding round, a major contract, or a change in profitability). Each new grant of EMI/CSOP options requires a current valuation. The share valuation for EMI and CSOP should be kept up to date: (1) Annual review — the valuation should be reviewed at least annually, as the company's financial position, market conditions, and comparables can change significantly over a year. (2) New funding rounds — if the company raises new equity funding, the funding round price may indicate the current market value. However, the funding round price may need to be adjusted for the different share class (e.g., preference shares vs ordinary shares). (3) Significant events — any significant event that affects the company's value should trigger a valuation review: (a) A major new contract or customer. (b) A significant change in revenue or profitability. (c) A change in the competitive landscape. (d) A change in the company's strategy or business model. (4) New grants — each new grant of EMI or CSOP options requires a current valuation. The market value is determined at the date of grant, so the valuation must reflect the company's position at that date. (5) Advance Assurance — if the company has Advance Assurance, it is valid for 120 days. If new options are granted after 120 days, a new Advance Assurance application is required (with an updated valuation). (6) Post-transaction valuation check — if the company has a PTVC for CSOP, the valuation is agreed for the specific grant. New grants require a new PTVC. Keeping the valuation up to date ensures that the company can grant EMI/CSOP options at the correct market value, minimising the risk of HMRC challenges and protecting the tax advantages. Relevant legislation: Schedule 5 ITEPA 2003 (EMI — market value at date of grant); Schedule 4 ITEPA 2003 (CSOP — market value at date of grant); HMRC Shares and Assets Valuation Manual. Example: A company obtains an EMI valuation of £4 per share in January 2026. It grants options in February 2026 (within 120 days of Advance Assurance). In September 2026, it wants to grant additional options. The valuation from January is now 8 months old, and the company has signed a major new contract. The company should obtain a new valuation and a new Advance Assurance before granting the September options. Common mistake: Using an old valuation for new option grants. The market value changes over time, and using an outdated valuation can result in the options being granted at the wrong value, potentially disqualifying the options or triggering income tax.

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Share Valuation for EMI & CSOP

Getting the share valuation right is critical for EMI and CSOP. Understand how HMRC values shares, the Advance Assurance process, and how to obtain certainty on market value.

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Share valuation is one of the most critical aspects of EMI and CSOP. The market value of the shares at the date of grant determines the EMI individual limit (£3 million), the CSOP limit (£60,000), and whether the exercise price is at or above market value (which affects the tax treatment on exercise). Getting the valuation wrong can result in the loss of tax advantages and unexpected tax charges. Understanding how HMRC values shares and how to obtain certainty through Advance Assurance is essential for any company granting EMI or CSOP options.

How HMRC Values Shares

HMRC's Shares and Assets Valuation (SAV) team values shares for tax purposes. The valuation is based on the 'open market value' — the price that the shares would fetch in an arm's length transaction. For private companies, the valuation considers: (1) Company financials — revenue, profits, assets, and cash. (2) Comparables — valuations of similar companies (public or private). (3) Discounts — minority discounts (for non-controlling shareholdings) and lack of marketability discounts. (4) Special factors — recent funding rounds, arm's length transactions, and any special rights attaching to the shares.

The Advance Assurance Process

For EMI, the company can obtain Advance Assurance from HMRC before granting options. Advance Assurance is a written agreement from HMRC confirming the market value of the shares for EMI purposes. The process: (1) The company submits a valuation to HMRC with supporting evidence (financial statements, comparables, funding rounds). (2) HMRC reviews the valuation and either agrees or proposes a different value. (3) If agreed, HMRC issues an Advance Assurance letter. The Advance Assurance provides certainty — if the company grants EMI options at the agreed value within 120 days, the valuation is binding on HMRC.

Post-Transaction Valuation

For CSOP, there is no Advance Assurance process — the company self-assesses the market value at grant and reports it to HMRC. HMRC can challenge the valuation during an enquiry. For EMI, if Advance Assurance was not obtained, HMRC can challenge the valuation during an enquiry. Post-transaction valuation can also be agreed with HMRC after the grant, through a post-transaction valuation check (PTVC). The PTVC process is similar to Advance Assurance but occurs after the grant.

Obtaining Certainty

To obtain certainty on the share valuation: (1) Obtain Advance Assurance for EMI — submit a valuation to HMRC before granting options. (2) Use a professional valuer — engage a qualified valuer to prepare the valuation and supporting evidence. (3) Document the valuation — keep detailed records of the valuation methodology, comparables, and assumptions. (4) Consider a PTVC for CSOP — submit a post-transaction valuation check after granting CSOP options. (5) Review regularly — valuations should be reviewed annually, as company circumstances change. Specialist advice is essential to ensure the valuation is robust and defensible.

Key Points

What You Need to Know

The market value at grant determines the EMI (£3m) and CSOP (£60k) limits and the tax treatment on exercise
EMI companies can obtain Advance Assurance from HMRC before granting options
CSOP has no Advance Assurance — the company self-assesses the market value
HMRC considers company financials, comparables, discounts, and special factors
Professional valuation and documentation are essential to defend the valuation

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