Enterprise Management Incentives (EMI): extending the option period

Strictly, two 10-year time limits currently apply to all EMI options.

Firstly, EMI options must be capable of being exercised within 10 years of the date of grant. This requirement will be met if any conditions that must be satisfied before an option can be exercised (for example financial performance conditions or that a sale, listing or other exit event occurs) can in principle be met within 10 years.

Secondly, options must actually be exercised within 10 years of the grant date for EMI tax relief to be available. For this reason, EMI options are usually granted on the basis that they will lapse if not exercised within 10 years.

However, from 6 April 2026 both these time periods will extend to 15 years for most employees (the current 10-year limit will continue to apply to EMI options granted to employees of certain companies registered in Northern Ireland).

Although these changes will not come into effect until the start of the 2026/27 tax year, qualifying companies could grant EMI options with a 15-year term now on the basis that:

• Those options will satisfy the current requirement to be capable of exercise within 10 years; and
• As a practical matter, have a lapse date that falls on or after 6 April 2026 (being the date on which EMI relief extends to 15 years).

However, it might be necessary for the company to amend the relevant plan rules so that new options can be granted on this basis under existing EMI plans.

If an existing EMI option would lapse on the tenth anniversary of its date of grant, and an exercise event (e.g. an exit) will not occur before then, in principle that option could be amended to defer the lapse date and allow more time for an exercise event to occur. Any options amended on this basis which would otherwise lapse before 6 April 2026 would only qualify for EMI relief if exercised on or after 6 April 2026 (i.e. once relief is available on the exercise of an option more than 10 years after it was granted).

However, if amending an option results in more than a minor improvement to one of its fundamental terms – which includes when the option can be exercised – this will be treated as the grant of a new option. Therefore, if the exercise price of an existing EMI option is less than the market value of its underlying shares on the amendment date, any resulting new option would be a ‘discounted’ EMI option (meaning that the growth in share value between the original date of grant and amendment of the option would be taxable as employment income on exercise). Should this be the case, there would also be a number of other issues to consider including, but not limited to, the impact on EMI qualifying limits.

To avoid this, Finance Bill 2025-26 contains specific legislation to prevent amending the lapse date of an EMI option that is capable of exercise on a single date (a ‘fixed date’ option) being treated as the grant of a new option. However, in our experience EMI options that can be exercised only on a single date set by reference to their grant date are rare. Instead, it is usual for EMI options to be exercisable for a short period (rather than for a single day) after the relevant vesting conditions have been satisfied. The lack of specific statutory protection where the lapse date of these EMI options is amended appears to be an odd omission. It might be that HMRC consider amending an EMI option that can be exercised other than on a single specified date in this way is not in fact an amendment to a fundamental term of the option as – based on HMRC’s published guidance on EMI options and Board discretion – when the option can be exercised is not being amended (rather when it may not be exercised is being changed).

However, in the absence of specific guidance from HMRC confirming their approach to amending the lapse date of EMI options other than ‘fixed date’ options, we strongly encourage companies that are considering amending an existing EMI option’s lapse date to discuss with us the implications of doing so based on their particular circumstances and, potentially, to seek clearance from HMRC before doing so.

Whether there would be any accounting implications of amending an EMI option’s lapse date should also be confirmed in advance.

The availability of EMI tax relief depends on certain requirements being met on the date of grant and, in some cases, continuously between the dates of grant and exercise, of the option. To ensure that EMI relief is appropriately targeted these conditions are relatively complex.

This can mean that unnoticed ‘disqualifying events’ can occur, or it may transpire that options were not qualifying to begin with. In these circumstances unexpected income tax charges can arise on exercise, and Business Asset Disposal Relief that could otherwise have been available on a sale of EMI shares might be lost.

For affected employees, the gap between their expected tax treatment and the actual position might only be discovered during a due diligence exercise immediately prior to a sale, listing or other exercise event when it is too late for employers to correct the position, and costly to compensate employees to avoid a loss of goodwill.

Additionally, HMRC guidance published since EMI options were granted might mean that features which were thought to comply with the rules at the time of grant might now not be acceptable to HMRC.

However, employers can minimise the risks and give themselves time to consider potential corrective action in advance of EMI options being exercised, if they review their qualifying status on a regular basis. This is particularly important in relation to older EMI options (such as options approaching a 10-year lapse date) where there has been more time for potential issues to arise.

Given the prospective changes to the EMI regime, and generally to ensure that EMI options deliver the expected tax and commercial benefits for employees and the business, companies with EMI plans should consider reviewing whether:

• Their existing EMI plan rules should be amended to provide for options to have a 15-year, rather than a 10-year, option period (bearing in mind that options granted to employees of certain Northern Ireland registered companies will remain subject to the existing 10-year limit);
• It would be appropriate to amend existing EMI options to extend their term from 10 to 15 years (and, if so, whether and how this could be done without jeopardising their tax advantages); and
• Anything has happened since options were granted that might result in a loss of some or all of the expected tax benefits. Points to consider include whether:
  • The grant of the option was correctly notified to HMRC (late notification without a reasonable excuse, or a failure to notify – particularly on a ‘roll over’ of EMI options – is a common cause of tax benefits being lost);
  • Any ‘disqualifying events’ have occurred in relation to the company (e.g. excluded activities have become a substantial part of its trade), the employee (e.g. a reduction in working time), or the option (e.g. certain amendments were made to the terms of the option or to the company’s share capital);
  • HMRC’s 2024 guidance on whether companies meet the independence requirement as they near a sale, or if investors hold ‘swamping’ rights that let them take control of the company in certain financial distress situations, mean that the company’s EMI qualifying status might be challenged; and
  • HMRC’s 2022 guidance on how Board discretion affects the tax-advantaged status of EMI options could mean that discretionary exercises (e.g. immediately prior to the lapse date if a vesting event has not otherwise occurred) would not attract EMI tax relief.

We advise on all aspects of the design, implementation and operation of EMI plans, and support employers to review, maintain, and remediate tax-advantaged status. Please contact the authors or your usual KPMG contact to talk through what the prospective extension of EMI option periods might mean for your EMI plan and subsisting options.

For further information please contact:

• Chris Barnes
• Joanne Brian