EMI Share Options Exercise 2026: CGT, BADR and Timing

Enterprise Management Incentive (EMI) options are one of the most tax-efficient ways to reward and retain employees in qualifying UK companies, offering the prospect of a 10% CGT rate on exit gains rather than income tax rates of up to 45%. But the tax outcome depends heavily on timing, whether the options qualify for Business Asset Disposal Relief (BADR), and whether any disqualifying events have occurred before exercise. Getting the exercise decision wrong can cost tens of thousands of pounds.

What EMI options are and why they are tax-efficient

EMI (Enterprise Management Incentive) options are government-approved share options available to UK companies with gross assets of £30 million or less and fewer than 250 full-time-equivalent employees. The company must carry on a qualifying trade -- most commercial activities qualify, but property development, legal and financial services, and farming are excluded.

The key tax advantage is that provided options are granted at or above the market value agreed with HMRC (a "Valuation Agreement"), there is no income tax or National Insurance at exercise. Instead, the employee pays Capital Gains Tax only when they sell the resulting shares, on the difference between sale proceeds and the exercise price paid.

Compare this with unapproved options, where the difference between market value at exercise and the exercise price is charged to income tax (and employee and employer NI). On a £200,000 gain, that can mean the difference between a £20,000 tax bill (EMI + BADR) and an £82,000 tax bill (unapproved, higher-rate employee).

Business Asset Disposal Relief: the 10% route

Business Asset Disposal Relief (formerly Entrepreneurs' Relief) reduces the CGT rate to 10% on qualifying disposals, up to a lifetime limit of £1 million of gains.

For EMI shares to qualify for BADR, you need:

1. EMI option granted at least two years before the disposal -- the clock starts at grant date, not exercise date. This is the most commonly overlooked rule.
2. The shares must be in a qualifying trading company at the time of disposal.
3. The option must not have been disqualified before exercise.

Importantly, you do not need to meet the standard BADR requirement of holding 5% of the shares and voting rights -- EMI shares get a special exemption from that test. This is a major advantage for employees with small percentage holdings in high-value companies.

In 2026/27, with BADR in place, the effective tax rate on a qualifying EMI gain of, say, £500,000 is just 10% = £50,000 CGT (minus the £3,000 AEA). Without BADR, the same gain at the higher-rate (24%) would cost £119,280.

Disqualifying events: what breaks EMI status

An EMI option loses its privileged tax treatment if a "disqualifying event" occurs before exercise. The most common disqualifying events are:

• The company ceases to be a qualifying company -- for example, it starts a non-qualifying activity, gross assets exceed £30 million, or the employee count rises above 250 FTE.
• The employee's commitment falls below the threshold -- they must work at least 25 hours per week or 75% of their total working time for the company (whichever is lower). Dropping to part-time can disqualify.
• The option terms are varied in a way that is not permitted under the EMI legislation.
• The employee leaves -- if an employee leaves without exercising, options typically lapse (subject to the scheme rules). If the company allows "leaver" exercise, but the employee no longer meets conditions, the gain may be subject to income tax.

After a disqualifying event, the employee has 90 days to exercise on EMI terms. After that window, any exercise triggers income tax and NI on the market value minus exercise price at the date of exercise.

Before vs after an exit: timing the exercise

The exercise decision is most acute when a company is approaching a sale or IPO. There are two broad approaches:

Exercise at exit (same-day exercise and sale)

The most common route. Options vest, the company is acquired, you exercise and sell simultaneously. The gain -- sale price minus exercise price -- is taxed as a capital gain (10% with BADR if conditions met). Simple, no cash needed to fund the exercise, minimal risk. The downside is the two-year rule: if the option was granted less than two years before the sale, BADR does not apply and the gain is taxed at 18% or 24%.

Early exercise (before exit)

Exercising early converts options into shares at the current (low) market value. Benefits include:

• The two-year BADR clock starts at grant, so this does not accelerate BADR eligibility.
• If the company grows significantly, future appreciation accrues as a further capital gain with a new CGT base cost equal to today's market value at exercise.
• Potential to use an S/EIS reinvestment relief if you dispose of the shares after a failed outcome and reinvest.

Risks include paying exercise price cash upfront, paying CGT on a future gain at a higher base, and -- critically -- losing your investment if the company fails before exit.

Worked example: exercising at exit

Sarah was granted 50,000 EMI options in March 2024 at an exercise price of £0.10 per share (HMRC-agreed market value at grant). In June 2026, the company is acquired at £4.00 per share.

• Exercise price paid: 50,000 x £0.10 = £5,000
• Sale proceeds: 50,000 x £4.00 = £200,000
• Capital gain: £200,000 - £5,000 = £195,000
• Less AEA: £3,000
• Taxable gain: £192,000
• CGT with BADR (10%): £19,200

The options were granted in March 2024 -- more than two years before the June 2026 disposal -- so BADR applies. Without BADR (higher-rate 24%), the tax would have been £46,080. BADR saves Sarah £26,880.

Common mistakes and how to avoid them

Not checking the two-year clock. Companies in fast-moving M&A situations sometimes grant options shortly before an expected exit, assuming BADR will apply. If the exit happens within two years of grant, BADR is lost.

Failing to register the option with HMRC. EMI options must be notified to HMRC within 92 days of grant (since 2024, via the online ERS system). Late notification disqualifies the option from EMI treatment entirely -- meaning income tax on the full gain at exercise.

Ignoring the discount on non-market-value grants. If the company grants options below the HMRC-agreed market value (for example, at £0.01 versus a £0.50 agreed value), the £0.49 discount is income tax and NI on exercise even for EMI options. This is rare but catches people off guard.

Not filing correctly on Self Assessment. Capital gains from EMI disposals must be declared on the CGT pages of your Self Assessment return in the tax year of disposal. The gain should also be reported on the Employment Related Securities (ERS) return filed by the employer.

Sources

• HMRC: Enterprise Management Incentives (EMI) technical guidance
• HMRC: Business Asset Disposal Relief
• HMRC: Capital Gains Tax rates and allowances 2026/27
• gov.uk: Employment related securities: reporting