IHT and EMI Shares UK: Inheritance Tax on Enterprise Management Incentive Options and Shares (2026)
Unexercised EMI options are in the IHT estate at intrinsic value — with no BPR. Exercised EMI shares in a qualifying trading company can qualify for 100% BPR after two years of ownership. The two-year clock runs from exercise date, not option grant. From April 2026, the £1m BPR cap affects senior employees with valuable share holdings.
| Asset at Death | IHT Value | BPR Available? | Notes |
|---|---|---|---|
| Unexercised EMI option (in-the-money) | OMV − exercise price | No | Option = contractual right, not business property |
| Unexercised EMI option (out-of-the-money) | Nil (worthless) | N/A | No intrinsic value if OMV < exercise price |
| EMI shares < 2yr ownership | OMV at death | No | Two-year test not met; full IHT at 40% |
| EMI shares ≥ 2yr, qualifying company (≤£1m) | OMV at death | 100% BPR | s105(1)(bb); mainly trading; no binding contract |
| EMI shares ≥ 2yr, qualifying company (>£1m excess) | OMV at death | 50% BPR (post-Apr 2026) | Above £1m cap: effective IHT rate 20% |
| EMI shares — binding sale contract at death | OMV at death | No (s113) | BPR lost on binding contract; cross-option preserves BPR |
EMI Options, Shares, and IHT: A Complete Guide
What are EMI options and shares?
The Enterprise Management Incentive (EMI) scheme is a HMRC-approved employee share option scheme for qualifying small companies (gross assets under £30m; fewer than 250 full-time employees; qualifying trade). Under EMI, a company can grant options to employees to buy shares at a fixed price (the exercise price — typically the market value at the date of grant, or lower if HMRC approves a discount). The option holder can exercise (buy) the shares at any time up to the option's expiry date. EMI options offer significant income tax and CGT benefits on exercise and sale: exercise at EMV (market value at grant) triggers no income tax (where exercise price is set at EMV); gains on sale are typically taxed at 10% under Business Asset Disposal Relief (BADR). For IHT purposes, EMI options and the shares they convert into are both potentially significant estate assets — either as unexercised options (with intrinsic value) or as exercised shares (potentially qualifying for BPR).
Unexercised EMI options at death
If an employee dies holding unexercised EMI options, the options may have a value in the IHT estate — the intrinsic value (also called the 'in-the-money' value): the open market value of the underlying shares minus the exercise price, if the shares are worth more than the exercise price. Example: EMI option to buy 10,000 shares at £1.00 (the exercise price set at grant). Current OMV of shares at date of death: £5.00 per share. Intrinsic value = (£5.00 − £1.00) × 10,000 = £40,000 included in the estate. The IHT treatment of unexercised options: options are personal property — a chose-in-action — in the estate, valued at their intrinsic value. BPR does not apply to the option itself (the option is not business property — it is a contractual right). No BPR on the in-the-money value of unexercised options. The estate may be able to exercise the options post-death (depending on the option terms — many EMI option agreements allow exercise within 12 months of death). If the PRs exercise the options and acquire shares, BPR may then apply to the shares (subject to the two-year ownership test — which runs from the date the shares are acquired, not the date the option was granted).
Exercised EMI shares: BPR qualification
Shares acquired by exercising EMI options are ordinary shares in the company. They are not treated differently for IHT purposes because they were acquired via EMI — the IHT treatment depends on whether the shares qualify for BPR under the standard BPR tests. BPR requirements for EMI shares under s105(1)(bb) IHTA 1984: (1) Unquoted shares: EMI shares are typically in unquoted (unlisted) trading companies — this condition is usually met. (2) Two-year ownership: the employee must have owned the shares for at least two years before death. The two-year clock runs from the date of exercise (when the shares are acquired), not from the date the option was granted. If an employee holds an option for five years but only exercises it six months before death, the two-year test may not be met — no BPR on those shares. (3) Mainly trading: the company must be wholly or mainly a trading company (s105(3) exclusion for investment companies). Most EMI-qualifying companies pass this test (the EMI regime itself excludes non-trading businesses). (4) Not subject to a binding sale contract (s113): if the company has a signed sale agreement at the date of death, BPR is typically unavailable. From April 2026: where BPR applies, the £1m combined BPR/APR cap means BPR is 100% only on the first £1m of qualifying assets; above £1m, BPR drops to 50% (effective IHT rate of 20%).
CGT rebase on death: EMI shares
On death, all assets (including EMI shares) are rebased to their market value at the date of death for CGT purposes (s62 TCGA 1992). This means the beneficiaries inherit the shares at the date-of-death OMV — not the exercise price paid by the deceased employee. The pre-death gain (from exercise price to OMV at death) is permanently wiped for CGT. The beneficiary only faces CGT on gains above the probate value if they later sell. For EMI shares where BPR also applies (shares in a qualifying trading company held for 2+ years): the estate pays no IHT (100% BPR, up to £1m cap); the beneficiaries inherit the shares at probate value (CGT rebase) — and face CGT only on post-death appreciation. This combination (BPR + CGT rebase) is the most favourable possible tax outcome for EMI shares held to death. However, the practical challenge is the two-year BPR clock: an employee must exercise options and hold shares for at least two years before death to qualify for BPR. Employees should consider exercising EMI options early — even if they do not intend to sell immediately — to start the two-year BPR clock.
The April 2026 BPR cap: impact on EMI shareholders
From 6 April 2026, the combined BPR/APR cap means that 100% BPR applies only to the first £1,000,000 of qualifying business property per estate. Above £1m, BPR is reduced to 50% (effective IHT rate of 20% on the excess). For EMI shareholders in fast-growing companies, the value of their EMI shares can exceed £1m well before death — particularly in technology or high-growth companies where shares may have appreciated significantly from the low exercise price. Example: EMI option exercise price £0.05 per share; OMV at death £10 per share; holding of 200,000 shares = £2,000,000. If BPR applies: first £1m at 100% BPR (nil IHT); second £1m at 50% BPR (effective 20% IHT = £200,000). The April 2026 cap significantly changes the IHT calculus for senior employees with valuable EMI share holdings. Planning options: lifetime PETs of EMI shares before values exceed the cap; life insurance in trust to cover the above-cap IHT liability; restructuring shareholdings between spouses (each gets their own £1m cap — the cap is per individual, not per company).
Practical planning for employees with EMI options
Employee-shareholders should consider the following: (1) Exercise options early to start the two-year BPR clock. If death occurs before two years of share ownership, BPR is lost — all shares are in the IHT estate at full OMV. Early exercise maximises the period available for BPR to accrue. (2) Make a will that properly addresses share holdings — including whether shares should go directly to beneficiaries, into a trust, or subject to a cross-option agreement with other shareholders. (3) Review the company's articles and shareholders' agreement: many shareholders' agreements restrict transfer of shares on death (a mandatory sale at OMV, or a cross-option agreement). A mandatory sale on death would mean BPR is unavailable (s113 binding sale contract). Cross-option agreements (the surviving shareholders have an option to buy, the estate has an option to sell — neither is obliged) preserve BPR. (4) Consider life insurance in trust for above-cap IHT: where shares are expected to exceed the £1m BPR cap, a whole-of-life policy in trust can fund the above-cap IHT. (5) Model the impact of early exercise on income tax: exercising EMI options may trigger income tax if the exercise price is below the EMV at grant date, or if HMRC has not approved the valuation.
Frequently Asked Questions
Do EMI shares qualify for Business Property Relief for IHT?
Yes — provided the standard BPR conditions are met. EMI shares in an unquoted trading company qualify for 100% BPR under s105(1)(bb) IHTA 1984 if: (1) the shares are unquoted; (2) the company is wholly or mainly trading; (3) the employee has owned the shares for at least two years before death (the two-year clock runs from exercise, not option grant); (4) there is no binding sale contract at date of death. From April 2026, the combined BPR/APR cap limits 100% BPR to the first £1m of qualifying assets per estate.
What happens to unexercised EMI options when someone dies?
Unexercised EMI options at death have an intrinsic value in the estate: (OMV of shares minus exercise price) × number of options = value included in IHT estate. BPR does not apply to options (they are contractual rights, not shares or business property). The personal representatives may be able to exercise the options post-death (depending on the option terms — typically within 12 months of death). If they exercise and acquire shares, the two-year BPR clock starts running on the acquired shares from the date of exercise.
How long do I need to hold exercised EMI shares before they qualify for IHT BPR?
Two years from the date of exercise — the date you actually acquired the shares by paying the exercise price. The option period does not count. If you held an EMI option for five years but only exercised it one year before death, the two-year BPR test is not met and BPR is unavailable. To maximise BPR protection, exercise EMI options as early as possible — even if you do not intend to sell — to start the two-year clock.
What is the impact of the April 2026 BPR cap on EMI shareholders?
From 6 April 2026, 100% BPR is limited to the first £1m of qualifying business property per estate. Above £1m, BPR is 50% (effective IHT rate of 20%). For employees in fast-growing companies where EMI share values may significantly exceed £1m, the cap creates an IHT liability above the threshold. Planning: transfer shares to spouse to use both caps (£2m combined); take out life insurance in trust to fund above-cap IHT; model the expected share value at likely death age and ensure cover is in place.
Is there CGT when inheriting EMI shares?
No — death is not a CGT disposal (s62 TCGA 1992). The beneficiary inherits EMI shares at the date-of-death market value (probate value) as their base cost. The pre-death gain (from the exercise price to the probate value) is permanently wiped. The beneficiary only faces CGT on gains above the probate value if they sell the shares after inheriting. Where BPR also applies, the estate pays no IHT and the beneficiary inherits with a high CGT base cost — the most tax-efficient combination.
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