Why the share value matters for EMI options
An Enterprise Management Incentive (EMI) option lets an employee buy shares later at a price fixed on the day the option is granted, called the exercise price. If the exercise price is at least the market value of the shares on that day, the employee pays no income tax or National Insurance when they exercise, and the whole gain is taxed as a capital gain when they sell. If the exercise price is below market value, the difference is taxed as income at exercise. Our EMI share options page covers who qualifies and the scheme limits.
For a private company there is no share price to look up, so the market value has to be worked out. HMRC's Shares and Assets Valuation team will check a proposed value before the options are granted and confirm it in writing. HMRC still offers this, through form VAL231, and it is voluntary. A company can grant EMI options without an agreed value, but if HMRC later decides the value was higher than the exercise price, the employee pays income tax on the difference.
An agreed value also settles how much of the company's £6 million limit and each employee's £250,000 limit the grant uses. The sections below explain the two values HMRC agrees, how to apply, what HMRC looks at and what happens around a funding round.
What this guide covers
- Actual market value and unrestricted market value
- Applying with form VAL231, and the 90-day validity
- What HMRC looks at, and how a funding round affects it
- The employee's tax with and without an agreed value
Actual market value and unrestricted market value
HMRC works with two values for shares under EMI options.
- Actual market value is the value of a share taking account of any restrictions attached to it, such as limits on selling it or a requirement to sell it back if the holder leaves. The exercise price is measured against this value, and an exercise price at or above actual market value means no income tax at exercise.
- Unrestricted market value is the value of the same share ignoring those restrictions, and is usually higher than actual market value. HMRC uses it to measure the £250,000 limit for each employee and the £6 million limit for the company.
Both values are for a small minority holding in a private company, so they are normally well below the price an investor paid in the last funding round. HMRC's own guidance says the same figure is often proposed for both values, and that both do not need to be agreed if the price agreed is at least the unrestricted market value.
Applying with form VAL231
The application is made on form VAL231, which is filled in online on GOV.UK. Progress cannot be saved, so have everything ready before you start. HMRC asks that the form is only sent once the company is in a position to grant the options, which means the scheme rules, the option agreements, the people receiving options and the number of shares are settled.
The form asks you to propose both an actual market value and an unrestricted market value for the shares under option, supported by a valuation. A valuation report for a startup usually draws on these documents.
- The latest statutory accounts and up-to-date management accounts
- The cap table, showing every shareholder, share class and option already granted
- The articles of association and any shareholders' agreement, with the rights of each share class
- Details of every share issue and transfer in the last few years, with prices
- The current business plan and forecast
- The number of options to be granted, to whom, and the proposed exercise price
How long an agreed value lasts
An EMI valuation agreed by HMRC is valid for 90 days from the date of the agreement. The 90 days apply only if nothing changes in the company's circumstances that might affect the value of its shares before the options are granted. If the options are not granted in the 90 days, a new VAL231 application is needed.
Plan the timetable so the option documents are finished before you apply, and grant on a date inside the 90 days. If a funding round, a large contract, a takeover approach or new accounts showing a different picture arrive in the meantime, treat the agreement as no longer reliable and apply again.
What HMRC looks at
HMRC's valuation manual treats recent share transactions as the first guide to value. It looks at whether there have been recent trades, how often they happen and whether anything about them was unusual. Frequent sales between employees or small unconnected investors can be a reliable guide. A single investment by an outside investor with extra rights needs adjusting before it says anything about the value of ordinary shares.
Other factors include the company's stage, how much more funding it will need, the rights of each share class, and the size and spread of the shareholdings. A small minority holding of ordinary shares in an unquoted company can carry a large discount, because its holder cannot control dividends, the board or a sale.
How a funding round affects the value
A priced funding round is the most recent evidence of what the company is worth, so it is the starting point for the next valuation. What it means for ordinary shares depends on what the investors bought.
Investors in a venture round often buy preference shares, which can carry the right to be paid back first on a sale, board seats and consent rights. Ordinary shares under option have none of these rights, so their value is lower than the round price. One example in HMRC's valuation manual involves a start-up whose investor paid £10 a share for shares with extra rights. A discount of at least 30% gave an actual market value of £7 for each ordinary share, and adding 10% gave an unrestricted market value of £7.70.
Shares issued under the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) cannot carry a preferential right to the company's assets on a winding up, so a round of SEIS or EIS shares gives less room for that kind of discount. The minority discount for a small holding can still apply.
A value agreed before a round reflects the company before the new money arrived. A term sheet signed after the value was agreed and before the options are granted is the kind of change in circumstances that ends the agreement, and a value agreed after the round will start from the round price. If you want to grant options at the pre-round value, agree the value and grant the options before the round is under negotiation.
Worked example of the employee's tax
The figures below are illustrative and use 2026/27 rates for England. A software company closed a seed round of preference shares at £1.50 a share six months ago and has traded in line with its plan since. It proposes an actual market value of £0.60 and an unrestricted market value of £0.90 for its ordinary shares, and HMRC agrees both. It grants an employee EMI options over 100,000 shares at an exercise price of £0.60.
With the agreed value
- The grant uses 100,000 × £0.90 = £90,000 of the employee's £250,000 limit.
- Four years later the company is sold for £5 a share. The employee exercises and sells at once: £500,000 of proceeds less £60,000 paid gives a gain of £440,000.
- No income tax arises at exercise, because the exercise price equalled the agreed actual market value.
- Business Asset Disposal Relief applies, because the option was granted more than two years before the sale and the employee worked for the company throughout. Tax: (£440,000 − £3,000 annual exempt amount) × 18% = £78,660.
Without an agreed value
Suppose instead the company had set the same £0.60 exercise price from its own estimate, without asking HMRC, and HMRC later decides the actual market value at grant was £1.00.
- The discount of (£1.00 − £0.60) × 100,000 = £40,000 is taxed as employment income at exercise. Because the company is being sold, the shares can be turned into cash straight away, so the tax goes through payroll.
- Income tax at 45%: £18,000. Employee National Insurance at 2%: £800. The company pays employer National Insurance at 15%: £6,000.
- The amount taxed as income is added to the cost of the shares, so the capital gain is £500,000 − £60,000 paid − £40,000 = £400,000, and (£400,000 − £3,000) × 18% = £71,460.
- The employee's total tax is £18,800 + £71,460 = £90,260, which is £11,600 more than with the agreed value, and the company pays £6,000 of National Insurance it would otherwise not owe.
A higher value at grant would also use more of the employee's £250,000 limit and the company's £6 million limit, which can push a large grant over a limit after it has been made.
Grant and reporting checks
- Grant options over a class of shares that qualifies for EMI: fully paid, non-redeemable ordinary shares.
- Record the agreed values and the date of HMRC's letter in the board minutes that approve the grant.
- Notify HMRC of each grant by 6 July after the end of the tax year in which it was made. For options granted on or after 6 April 2027, draft legislation published in July 2026 replaces the separate notification with details given in the annual return.
- File the scheme's annual return by 6 July every year.
Help agreeing your valuation
We prepare the valuation, propose the actual and unrestricted market values, submit the VAL231 and answer HMRC's questions, and time the application so the options are granted inside the 90 days. Setting up an EMI scheme is £2,950 + VAT, including the valuation agreed with HMRC and the notification, and the annual return is £295 + VAT a year. Our EMI share options page sets out the full service.
Related reading
