When someone with an Enterprise Management Incentive (EMI) scheme leaves a company, there are three main possibilities: the options lapse, they are kept for a future event such as an exit, or they are exercised. Each choice has implications for tax, reporting, company culture and, most visibly to investors, your cap table. Founders and finance teams need to act quickly while managing risk and preserving the scheme’s integrity.
This guide is written for busy CEOs, pragmatic finance leads, and in house counsel handling leavers for the first time or dealing with complex situations. It covers how to categorise leavers, decide outcomes, manage deadlines, and apply discretion correctly.
Legal guidance is important throughout this process to ensure compliance with plan rules, protect EMI status, and reduce the risk of disputes, and our EMI scheme solicitors can help you through every step of the way.
Contents:
- EMI treatment on leaving: options, tax status and reporting
- Gathering the EMI paperwork and applying discretion
- What happens to vested and unvested EMI options when an employee leaves?
- EMI good leavers and bad leavers: why leaver status matters
- What happens to EMI options when an employee leaves a company?
- What happens to EMI options when an employee changes roles or companies within a group?
- EMI option exercise deadlines, funding and illiquid shares
- EMI options for employees moving abroad or joining a competitor
- Preparing for exit and avoiding common pitfalls
- When to involve EMI scheme solicitors
EMI treatment on leaving: options, tax status and reporting
EMI treatment depends on both the plan rules and the type of leaver. Unvested options may lapse automatically, while vested options may be exercisable for a limited period, if the plan rules provide for this, or retained until a specific event, such as a change of control. From a tax perspective, ceasing to be an employee of the relevant company or a qualifying group company is a disqualifying event for EMI purposes. Favourable EMI tax treatment is preserved where the option is exercised within 90 days of the disqualifying event. After that window, an income tax charge relating to an original discount at grant may also remain relevant. The contractual exercise period under the plan rules is separate from this statutory 90 day tax window.
Founders also need to keep an eye on annual ERS returns, which are due by 6 July following the tax year. A return, including a nil return where appropriate, is required for each registered EMI scheme while the reporting obligation continues. For grants made on or after 6 April 2024, the grant notification deadline has also moved to 6 July following the end of the tax year. Grants before that date still follow the historic 92 day rule. HMRC has announced that the separate grant notification requirement is due to be removed for options granted on or after 6 April 2027, subject to legislation. Under the proposals, those grants would instead be reported through the EMI end of year return expected to start with the 2027/28 return (due 6 July 2028). Instructing lawyers at this stage helps ensure all filings are completed correctly, deadlines are met, and your documentation is defensible in case of scrutiny.
You can find out more about the difference between exit based, time and performance based EMI schemes in our guide.
Gathering the EMI paperwork and applying discretion
Before making any decisions about a leaver, gather the full paper trail. This includes the EMI plan rules and any schedules, individual option agreements, board or shareholder resolutions, and valuation or grant notification evidence.
Board or remuneration committees may have discretion over certain outcomes, in which case it is important to apply it consistently and document all decisions. Any discretion should also be exercised within the scope of the option documentation and with regard to relevant employment law duties and the implied duty of good faith where applicable.
It is important that you keep your cap table up to date as soon as options lapse, are exercised, or carried forward. Messy records can raise concerns for buyers and complicate fundraising or exit processes.
What happens to vested and unvested EMI options when an employee leaves?
Vesting generally means the option holder has earned the right to exercise the option under the plan, subject to any exercise conditions. Unvested options often lapse automatically on cessation of employment, but this depends on the terms of the scheme and option agreement. Vested options are typically exercisable for a short window, where the rules provide for one, or may be held over until a specified event if the plan allows. The contractual exercise period should not be confused with the statutory 90 day period following an EMI disqualifying event, which determines whether EMI tax advantages are preserved.
EMI good leavers and bad leavers: why leaver status matters
Leavers may be categorised as good, bad, or very bad, where the scheme rules use those categories, which guides how options are treated and promotes fairness and consistency.
Good leaver: typically involuntary (for example redundancy, long term ill health or death) or, in some cases, mutual agreement where the board exercises discretion. Depending on the scheme rules, unvested options usually lapse; vested options are normally exercisable within a defined contractual window.
Bad leaver: usually resignation, particularly to join a competitor. Depending on the scheme rules, unvested options typically lapse; vested options often have only a short exercise window or lapse entirely in exit only schemes.
Very bad leaver: typically, serious misconduct, fraud, breach of confidentiality or IP theft, or team poaching. Loss of all options (vested and unvested) is common where the option terms expressly permit it.
These labels are contractual concepts only; they are not prescribed by EMI legislation. They must be applied carefully in accordance with the scheme rules, the employment contract and any relevant employment law obligations (including the implied duty of good faith). Restrictive covenants are a separate issue and do not determine the EMI tax treatment of a leaver, although they may be relevant to the employer’s wider response to a departure. Legal guidance ensures evidence and process are robust, reducing the risk of grievances or tribunal claims.
What happens to EMI options when an employee leaves a company?
When options lapse, the board should minute the decision, provide written notice to the leaver for good practice even if this is not legally required, and update any option register and cap table. Relevant lapses and other reportable EMI events should be included in the appropriate EMI end of year return where required by HMRC’s reporting template. The end of year return is due by 6 July following the relevant tax year. Common mistakes include failing to update records promptly.
If options are retained for a future event, the board should confirm the leaver category, record the retention in minutes, specify the end date or trigger, and check carefully whether the option will remain exercisable after an EMI disqualifying event and what tax consequences will follow. Restrictive covenants should only be amended or restated where legally appropriate and supported by consideration where required; retaining an option does not of itself require covenants to be restated. Any later exercise must still be reported in the ERS return where required by the applicable reporting rules.
When options are exercised, typical steps are: prepare board minutes and an exercise notice, collect the exercise price, issue the shares, update the registers and cap table, and consider PAYE/NIC if the shares are readily convertible assets. No income tax or NIC applies on the exercise of an EMI option granted at not less than market value where the relevant EMI tax conditions are satisfied. If the option was granted at a discount, income tax may still arise by reference to that original discount. Where a disqualifying event has occurred, full EMI tax advantages are preserved if the option is exercised within 90 days. After that window, the post disqualifying event growth may be subject to income tax and, where the shares are readily convertible assets, Class 1 NICs may also arise.
What happens to EMI options when an employee changes roles or companies within a group?
If your employee is transferred to an overseas company, the key EMI question is whether the new employing company is still a qualifying group company for EMI purposes and whether the employee continues to satisfy the statutory employment and working time requirements. A transfer outside the qualifying group can constitute a disqualifying event. You might allow them to exercise their options, particularly if there may be adverse tax consequences because of the move.
If your employee is moving to the US, you need to be particularly careful as there can be adverse tax consequences under both UK and US tax rules, so specialist cross border tax advice should normally be sought. If your employee changes roles, the key thing to watch out for is that they continue to meet the EMI working time test, which generally requires them to spend at least 25 hours a week, or if less, at least 75% of their total working time, working for the EMI company or a qualifying subsidiary.
EMI option exercise deadlines, funding and illiquid shares
Plan operators must observe key deadlines: where a disqualifying event occurs, allowing exercise within 90 days can preserve EMI tax advantages, but whether the employee actually has a contractual right to exercise in that period depends on the scheme rules; file ERS annual returns by 6 July; and meet the applicable EMI grant notification deadline for grants made before 6 April 2027, subject to the proposed legislative change from that date. Missing reporting obligations can lead to penalties and, in the case of a late grant notification, may put EMI tax relief at risk unless HMRC accepts a reasonable excuse.
Funding exercises in private companies can be challenging. Options include employee loans or bonuses, or aligning exercise with a buyer’s timetable in a secondary sale. Any employee loan, bonus or other funding arrangement should be reviewed separately for tax, employment, company law and financial assistance implications as relevant. Planning the PAYE and NIC implications in advance is good practice, and legal advice helps structure these arrangements correctly.
When shares are illiquid, it is important to clearly explain restrictions, information rights, pre emption rights, and transfer processes as part of the exercise process. Lawyers can ensure communications are both clear and legally robust.
EMI options for employees moving abroad or joining a competitor
If a leaver reduces their working hours below the requirement, this is a potential EMI disqualifying event. HMRC treats failure to satisfy the working time requirement as a disqualifying event, subject to the statutory rules for calculating working time and permitted absences. The 90 day period then runs from the relevant disqualifying event for tax relief purposes.
Cross border moves can also change PAYE/NIC obligations and may give rise to tax liabilities in more than one jurisdiction. When someone leaves for a competitor, the outcome under the option scheme should be determined by the plan and option terms; any separate enforcement action should align with enforceable covenants.
When an employee leaves for a competitor, it can be helpful to have appropriately drafted restrictive covenants in place, although their enforceability will depend on the circumstances and they are not a condition of EMI treatment. You can read more about them in our restrictive covenants guide.
Preparing for exit and avoiding common pitfalls
Buyers scrutinise option registers, leaver files, vesting calculations, HMRC grant notifications, and ERS returns. Common red flags include undocumented discretion, ambiguous leaver labels, missed filings, and PAYE errors. For transactions taking place from 6 April 2026 onwards, buyers should also check whether the business and its options have been assessed against the current EMI limits and rules. From 6 April 2026, the general EMI company limits increased to gross assets of £120 million, fewer than 500 full time employees and £6 million of unexercised qualifying EMI options, although different limits can continue to apply to certain Northern Ireland companies trading in goods or electricity. The maximum individual EMI option limit remains £250,000.
The maximum permitted option period has also increased from 10 years to 15 years from 6 April 2026 for companies to which the new rules apply, including certain existing options that have not already expired, lapsed or been exercised, where the necessary contractual amendments are made.
A pre exit EMI health check by solicitors can prevent price reductions and last minute stress at the closing table.
A clean and defensible leaver process involves gathering paperwork, categorising the leaver under the scheme rules, board minuting the decision, calculating vesting, lapse and exercise windows, communicating terms and any relevant covenants, managing exercise and funding, filing returns, and updating registers and the cap table.
When to involve EMI scheme solicitors
You should seek legal advice if a leaver’s status is unclear, there is an overseas move, funding is an issue, you are fundraising or heading for exit, or you are unsure how to preserve EMI tax advantages and meet reporting obligations.
Our specialist EMI scheme solicitors can review your plan, confirm leaver outcomes, advise on the legal aspects of tax and PAYE/NIC treatment in conjunction with specialist tax advisers where appropriate, and prepare all communications and filings.
If you want to learn more about EMI, from the qualifying criteria to the registration process, and how it could benefit you, read our article: FAQs: setting up an EMI scheme.
The best of both worlds: expert legal support, easy online access
We provide ongoing support for your employee share schemes through our easy-to-use online platform, managing your share plans end-to-end, offering 24/7 access, clear cap table visibility, simplified reporting, and expert legal support — all for just £115 a month.
