EMI Tax Valuation: HMRC Agreement, Exercise, and CGT on Sale

An EMI tax valuation is the exercise of pricing a company’s shares for an Enterprise Management Incentives option scheme, and then, ideally, getting HMRC’s Shares and Assets Valuation office to agree those figures in writing before options are granted. It produces two numbers: the Unrestricted Market Value, which measures options against the scheme’s statutory limits, and the Actual Market Value, which sets the floor for the exercise price if you want employees to escape an income tax charge when they exercise.¹ Agreement is voluntary. Skipping it is where the trouble usually starts.

The Two Values a Valuation Produces

Unrestricted Market Value (UMV) is what the shares would fetch on the open market if sold freely, ignoring restrictions like forfeiture clauses or mandatory buyback provisions. It is the figure used to track EMI’s statutory limits.

Actual Market Value (AMV) is what the shares are genuinely worth once those real-world restrictions are taken into account. AMV matters because of a simple rule: set the exercise price at or above AMV at the date of grant and no income tax arises when the employee exercises. Set it below AMV and income tax is charged on the discount.²

Both terms take their legal meaning from the market value definition in the Taxation of Chargeable Gains Act 1992, which assumes a hypothetical sale on the open market to a prudent buyer with all the information they would reasonably need.³ The application to EMI sits in Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003.⁴

UMV also polices two caps. Each employee can hold EMI options over shares with a UMV of up to £250,000 in any three-year rolling period.⁵ At company level, the total UMV of all outstanding EMI options must not exceed £6 million from 6 April 2026, or £3 million if the company is classified as a Specified Company; before that date the ceiling was £3 million across the board.⁶

Why Get HMRC to Agree the Values

Some companies pick a plausible exercise price and move on. The risk sits in the future. If HMRC later concludes the exercise price was below AMV at grant, the employee faces an income tax charge on exercise. The taxable amount is the lower of the original discount or the difference between the market value at exercise and the price paid.² That challenge can surface years later during an enquiry into a share sale or exit.

HMRC’s Shares and Assets Valuation office runs a voluntary checking service.¹ An Agreement Letter is the point of the exercise: it confirms HMRC will accept the UMV and AMV, and it removes the risk of a later challenge. Without one, the company is self-certifying.

How the Share Price Is Worked Out

There is no single formula. HMRC’s starting point is real transactions. If the company has recently raised funding or shares have changed hands between unrelated parties, those arm’s-length prices carry the most weight. The valuer should look at how often trades have happened and at any unusual features of the deal, such as investor preferences that inflate the headline price.¹

Where recent transactions are absent, earnings-based methods are the usual route. That means calculating earnings per share and applying a price-earnings ratio drawn from comparable quoted or private companies in the same sector. Where debt significantly depresses post-tax profits, an enterprise valuation using EBITDA multiples may fit better. The BDO Private Company Price Index and the PERDa database provide benchmarks for private-company multiples.¹

Early-stage companies are the hardest cases. A balance sheet rarely captures IP or growth potential that hasn’t produced revenue yet. HMRC’s guidance uses technology start-ups as an example, where the balance sheet is mainly cash raised from shareholders earmarked for operations. The valuation then leans on funding history, the rights attached to each share class, and product stage.

Minority Discounts

EMI options typically cover a small slice of the total share capital, and a minority holding is worth far less than a controlling stake. HMRC’s guidance shows discounts of around 30% for shares with fewer rights in a start-up, and 60% to 65% when comparing a minority holding in an unquoted company against a quoted peer.¹ The exact figure depends on how small the holding is, its voting rights, and whether an exit is in sight.

Restrictions and Investor Preferences

Employee shares often carry restrictions that pull AMV below UMV. Bad-leaver clauses force departing employees to sell back at a fraction of value. Drag-along rights compel minority holders into a sale. Pre-emption rights block sales to outside buyers. Each is a reason AMV sits below UMV.

Investor preferences compound the effect. Where the Articles give some shareholders liquidation preferences or anti-dilution protection, those advantages come out of the ordinary shares issued under EMI. On a sale, preferred shareholders are paid first and the ordinary shares take what remains. A valuer has to model that waterfall to work out what the ordinary shares are actually worth.

Applying for a Valuation Check

The company applies using Form VAL231, available on GOV.UK.⁷ It asks for the company’s registration details, the proposed UMV and AMV, the share class being issued, and the justification for any discounts.

The supporting pack decides how quickly the process moves. Useful documents:

Recent statutory accounts, ideally with prior years to show a trend.
Up-to-date management accounts, no more than a few months old.
A capitalisation table showing every share class, the rights attached, and any convertibles or warrants outstanding.
Details of recent funding rounds, share transfers, or offers for the business.
A written valuation narrative setting out methodology and the basis for any discounts.

The completed form and supporting documents go to HMRC’s Shares and Assets Valuation office.⁸ Incomplete submissions and vague narratives are the usual cause of delay.

What Happens After You Submit

HMRC will either issue an Agreement Letter accepting the proposed values, or send a Questionnaire asking for more. Questions typically probe the choice of comparables, the rationale for the minority discount, or the treatment of investor preferences. This is normal, especially where the capital structure is complex. Straightforward cases are often resolved within a few weeks.

An Agreement Letter is valid for 90 days.¹ Options must be granted within that window, and nothing can change in the company’s circumstances that would affect share value during it. If the 90 days lapse, or a material event happens in the meantime such as a new funding round or a significant contract win, you go back to the start. The window was 120 days between March 2020 and December 2022 before reverting on 1 December 2022.⁹

What the Valuation Buys You at Exercise

If the exercise price was set at or above AMV at grant, no income tax is due when the employee exercises. The whole gain is deferred to capital gains tax on eventual sale.

If the exercise price was set below AMV, income tax is charged on the discount, calculated as the lower of the discount at grant or the difference between market value at exercise and the price paid. National insurance also applies where the shares are readily convertible assets.² One relief: if market value at exercise has fallen below the exercise price, no income tax charge arises.

Where the exercise price was at or above AMV, and the option is exercised within ten years without a disqualifying event, the employee gets the full EMI advantage. No income tax and no national insurance on the gain between exercise price and share value at exercise.¹⁰

Capital Gains Tax on Sale

When the employee sells the shares, the gain above the exercise price (or above AMV at grant, if higher) is subject to capital gains tax at standard rates of 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers from 6 April 2025, with a £3,000 annual exempt amount.

EMI shares qualify for Business Asset Disposal Relief where the employee has held the options and shares for a combined total of at least 24 months.¹¹ The BADR rate is 14% from 6 April 2025, rising to 18% from 6 April 2026. The lifetime limit on qualifying gains is £1 million.

One trap catches people out. BADR eligibility lapses the moment the employee leaves employment, whatever the holding period. The 90-day post-employment window that preserves income tax treatment at exercise does not extend to BADR. A leaver who exercises within 90 days and then sells will pay standard CGT rates on the disposal gain.

Events That Can Undo the Tax Advantage

Certain changes strip EMI options of their tax advantages. HMRC lists these disqualifying events:

Loss of independence, where the company comes under the control of another company.
Trading activities change so the company no longer meets the qualifying trade requirement.
The employee ceases to meet the working time or other eligibility conditions.
The terms of the option are altered after grant.
The share capital is restructured or shares are converted.
A later CSOP option grant pushes the employee over the £250,000 combined threshold.

If the employee exercises within 90 days of the disqualifying event, the tax advantages are preserved. Outside that window, an income tax charge arises on exercise.¹²

Notification Deadline After Grant

Agreeing a valuation and granting options does not close out compliance. The company must notify HMRC after grant. For options granted on or after 6 April 2024, the notification is due by 6 July following the end of the tax year in which the grant occurred. For options granted before that date, the old 92-day deadline from grant applied.¹³

Miss this and the tax advantage is at risk for both company and employee. There is no formal appeal for late notifications, so it belongs inside the grant workflow rather than in a follow-up pile.

1
GOV.UK. Shares and Assets Valuation Manual – SVM110050
2
GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM57030
3
Legislation.gov.uk. Taxation of Chargeable Gains Act 1992 – Part VIII
4
GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM52010
5
GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM51050
6
GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM51060
7
GOV.UK. Apply for a Share Valuation Check for Enterprise Management Incentives (VAL231)
8
GOV.UK. Get a Share Scheme Valuation From HMRC
9
Tax Journal. EMI Share Valuation Period to Revert to 90 Days
10
GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM57040
11
GOV.UK. Business Asset Disposal Relief – Eligibility
12
GOV.UK. Employee Tax Advantaged Share Scheme User Manual – ETASSUM57050
13
GOV.UK. Submit an Enterprise Management Incentives (EMI) Notification