The cruel irony of EMI is that the events most likely to strip it away are the ones you have been working towards: a funding round that changes control, the hire that tips you past 250 people, an acquisition offer. Each can turn a tax-advantaged option into an income-tax charge, and often the option holder finds out too late to act. Below are the events that trigger it, what happens to the tax treatment when one lands, and the moves founders and option holders can still make.
What a disqualifying event is and why it matters
A disqualifying event is a change that causes an existing EMI option to stop meeting the qualifying conditions that give it its tax advantage. Under the EMI rules, a company must keep meeting ongoing tests covering its size, activities and structure, and the employee must keep meeting the working-time requirement.
When any of those conditions breaks down, the option falls out of the EMI regime from that date. The practical consequence is sharp: gains that accrue after the event can lose their EMI treatment and be charged as employment income rather than as a capital gain.
There is a saving mechanism. A statutory window opens after the event, and an option holder who exercises inside it keeps the EMI advantage on the value built up before the event. Growth after the event date is treated differently.
The point is that this is knowable in advance. Every company with EMI options live should know which corporate moves would trigger the outcome before they make them, not discover it when an employee tries to exercise.
Company-level disqualifying events
Company-level events are the most common disqualifying triggers for funded startups, because they arise from the corporate actions that fast-growing companies take: raising money, hiring, and being acquired.
Loss of independence
An EMI-qualifying company must be independent: it must not be under the control of another company. If a new investor, acquirer, or group structure means that another company acquires control of the EMI company, the loss-of-independence test is triggered. This is the single most common disqualifying event for startups at Series A and beyond, because a lead investor taking more than 50% of voting rights in the company can constitute control. Founders should review the EMI position before every funding round that involves a change in voting control, not just a formal acquisition.
Breach of the gross-assets test
The EMI company must have gross assets of no more than £30m at the time of grant and, in most cases, on an ongoing basis. A company whose balance sheet grows through asset acquisition, IP capitalisation, or cash raised but not yet deployed can approach or breach this threshold. The gross-assets figure to monitor is the consolidated balance sheet figure across any group.
Reaching 250 full-time-equivalent employees
The EMI qualifying conditions require the company to have fewer than 250 full-time-equivalent employees. Reaching 250 FTE means new EMI grants cannot be made, and the existing options are affected from that point. For high-growth companies this threshold can arrive quickly and without warning if headcount is tracked loosely. FTE is the measure, not headcount: part-time employees contribute a fraction of a full-time unit.
Starting an excluded activity
Certain activities are excluded from EMI, including property development, financial activities, and farming. If a company diversifies into an excluded activity, even as a secondary line of business, it risks the qualifying conditions. Companies expanding into adjacent markets should check the excluded-activities list against the new activity before launch.
Employee-level disqualifying events
Employee-level events affect the specific option holder rather than the entire option pool. They arise when the individual no longer meets the conditions attached to their holding.
Failing the working-time requirement
An EMI option holder must meet the working-time requirement, which requires them to work for the qualifying company (or a qualifying subsidiary) for at least 25 hours a week, or if less, at least 75% of their total working time. An employee who moves to a part-time role, takes extended unpaid leave, or takes on substantial consulting work outside the company may fall below this threshold. Leavers who remain on the cap table as option holders but are no longer employed by the company will also fail this test.
Ceasing to be employed by the qualifying company
If the option holder leaves employment at the qualifying company, that is itself a disqualifying event. Leaver provisions in the option agreement govern what happens to unvested options, but for vested EMI options the tax consequence of the disqualifying event still turns on whether the holder exercises inside the statutory post-event window.
Option-level and structural events
Beyond company and employee conditions, certain changes to the option itself or to the share structure it sits on can also constitute disqualifying events.
Variations to option terms
An alteration to the terms of an EMI option (for example, changing the exercise price, the vesting conditions, or the class of shares over which the option is granted) can be a disqualifying event if the change is not one that the legislation explicitly permits. Any variation to an existing EMI option agreement should be reviewed for its EMI impact before it is executed.
Share reorganisations and exchanges
Certain share reorganisations affecting the shares underlying an EMI option can trigger a disqualifying event. The position on share-for-share exchanges, which arise frequently on a company flip or holding-company insertion, requires particular care. A section 135 TCGA share-for-share exchange is not itself a disposal for CGT purposes, but it is subject to the section 137 anti-avoidance test. A properly structured exchange of the EMI options themselves (rather than a disposal of the shares) can in some circumstances preserve EMI status and avoid a disqualifying event, but this requires specialist structuring. For growth shares context and section 431 elections on restricted securities, see the sibling guides at growth shares explained and section 431 elections.
The tax-consequence window
When a disqualifying event occurs, the option does not automatically become worthless or the tax advantage does not vanish immediately. There is a statutory window after the event within which the option holder can exercise and preserve the EMI tax advantage on the value that had accrued up to the date of the event. If the option is exercised inside that window, the portion of the gain representing growth up to the event date retains its EMI character. Growth that accrued after the event date is treated differently and may be subject to income tax and NIC as employment income rather than as a capital gain on sale.
The precise number of days in the statutory exercise window turns on the event type, so read it off the HMRC Employee Tax Advantaged Share Scheme User Manual (ETASSUM) chapter that applies to your event before making any exercise decision. Because this is a hard deadline that decides whether a gain is taxed as capital or as income, confirm the exact figure for your situation rather than working from a general rule of thumb.
The worked timeline below illustrates the principle with illustrative figures only.
Illustrative timeline: acquisition trigger and exercise
| Date | Event | Tax position (illustrative) |
|---|---|---|
| Year 1 | Company grants EMI option at an exercise price of £1 per share, agreed with HMRC Shares and Assets Valuation | No income tax or NIC on grant (EMI advantage applies) |
| Year 3 | Acquirer takes a controlling interest in the company (loss-of-independence event). Shares are independently valued at £10 per share at this date. | Disqualifying event occurs. The £9 per share gain up to this date retains EMI status if exercised within the statutory window. |
| Within statutory window | Option holder exercises inside the window at £1 per share. Shares are then sold. | The £9 gain (exercise price to event-date value) is treated as a capital gain, potentially eligible for BADR at 18% if the two-year holding rule is met. Any additional growth between the event date and sale is assessed separately and may be taxed as employment income. |
| After statutory window lapses | Option not yet exercised. | The full gain on exercise is likely to be charged as employment income rather than a capital gain, losing the EMI advantage on the pre-event growth as well. |
These figures are illustrative only. The actual tax outcome depends on the facts, the specific event type, the timing of exercise, and the applicable ETASSUM rules. Speak to an adviser before exercising.
BADR and CGT on eventual sale
For option holders who exercise inside the statutory window and then hold the shares, the eventual sale of those shares engages the CGT rules. The two rates on share disposals are 18% within the basic-rate band and 24% above it.
EMI shares carry a CGT advantage on sale that is easy to underrate. They qualify for Business Asset Disposal Relief (BADR) at 18% on a two-year holding, and they skip the 5% personal-company test that non-EMI shares have to clear, against a £1m lifetime limit. So an employee who exercises and holds their EMI shares for two years can reach BADR without ever owning 5% of the company, which is the very ceiling that would shut most startup staff out of the relief on ordinary shares.
A disqualifying event can affect the income-tax versus CGT treatment on the exercise itself, as described above. But if the option was exercised inside the statutory window and the shares are then held for the required period, the BADR position on the sale of those shares is a separate question and is determined by the BADR rules at disposal. To model the difference between exercising under an EMI scheme and outside it, use the EMI vs unapproved options calculator.
Disqualifying event map
| Event | Level | Immediate effect on the option | Action to consider |
|---|---|---|---|
| Another company acquires control (loss of independence) | Company | EMI qualifying status ends from event date; gains after event date at risk of employment-income treatment | Consider exercising inside the statutory window; take specialist advice before the window closes |
| Gross assets exceed £30m | Company | As above; new grants also cannot be made | Monitor balance sheet against the £30m threshold; consider CSOP as a fallback for new grants |
| FTE headcount reaches 250 | Company | As above; no new EMI grants from this point | Track FTE carefully as you scale; assess CSOP for post-250 hires |
| Company begins an excluded activity | Company | As above for options in force from event date | Review new business lines against the excluded-activities list before launch |
| Employee fails the working-time requirement | Employee | That individual's EMI options affected from the date the requirement is first missed | Review before changing an option holder's hours or role; consider whether exercise before the change is appropriate |
| Employee leaves the qualifying company | Employee | EMI qualifying status ends; leaver provisions in the option agreement govern unvested options | Check the statutory exercise window for vested options; report the leaver event on the ERS return |
| Option terms are varied | Option | If the variation is not a permitted change, the option is treated as a new grant outside the original EMI agreement | Take advice before varying any EMI option terms; document the rationale and whether the change is permitted |
| Share reorganisation or exchange | Option / structural | Depends on structure; a qualifying share-for-share exchange under s.135 TCGA may not be a disposal but is subject to s.137; EMI option exchange requires specialist structuring | Model the exchange structure early and take HMRC clearance where available; do not assume a share-for-share preserves EMI status without advice |
Reporting the event and next steps
Disqualifying events must be reported to HMRC through the Employment Related Securities (ERS) annual return. The ERS return is due by 6 July after the end of the tax year. Nil returns are required even when nothing has happened in the year. Missing the 6 July deadline exposes the company to penalties, and failure to report a disqualifying event correctly can complicate the option holder's tax position at exercise or sale.
If you are operating an EMI scheme and you believe a disqualifying event may have occurred, the steps are:
- Identify the date the qualifying condition was first breached. That is the event date for all purposes.
- Assess whether any affected option holders are still within the statutory exercise window and want to exercise before it closes.
- Ensure the event is captured on the next ERS return (or an amended return if the annual deadline has already passed).
- If the company is approaching the 250 FTE or £30m gross-assets thresholds, consider whether CSOP would be the appropriate vehicle for future grants. CSOP carries a lower £60,000-per-employee ceiling but stays open to companies that have outgrown the EMI size tests.
For a live case, particularly one involving a funding round, acquisition approach, or headcount milestone, speak to us before the event closes. The EMI scheme setup and advisory service covers both new grants and the ongoing compliance of existing schemes, including disqualifying-event triage. You can also review the related guides on EMI qualifying company rules, EMI option valuation, and EMI vs CSOP. Funded startups running equity schemes as part of a broader cap-table strategy can find the full picture at our funded-startups hub.