An Enterprise Management Incentive option carries a UK tax advantage that the United States does not recognise. HMRC normally charges no income tax or National Insurance at exercise when the price is at least the market value at grant, and taxes the growth as a capital gain on sale. The IRS usually treats the same option as a nonstatutory option, so a US citizen has compensation income on the spread in the year of exercise.
This post is for US citizens and green card holders who work for a UK startup or scale-up and hold, or have been offered, EMI options. It goes deeper than the share plan section of our guide to US-UK tax for founders, fund managers and executives. It covers the UK reliefs, the US charge at exercise, sourcing, the timing gap that affects the foreign tax credit, section 83(b) and records.
How does the UK tax an EMI option
In the UK an EMI option is tax-advantaged. Where the option meets the qualifying conditions and is exercised at a price no lower than the market value of the shares when it was granted, there is normally no income tax or National Insurance on exercise. Capital gains tax may then apply when the shares are sold.
HMRC's guidance on Enterprise Management Incentives (opens the official GOV.UK page in a new tab) sets conditions for both the company and the employee. The company must be below limits on gross assets and full-time employees, which were raised from 6 April 2026, and must not carry on an excluded activity. The employee must meet a working time requirement, and the market value of options any one employee can hold is capped. The option agreement fixes whether it can be exercised within ten or fifteen years.
Where an option was granted at a discount, the discount is charged to income tax at exercise. Some events, such as leaving the company or ceasing to meet the working time requirement, are disqualifying events. An option exercised within ninety days of one keeps its relief. Exercised later, the growth in value from the event to exercise is charged to income tax. Our UK Self Assessment service reports the eventual sale on the SA100 return.
- A qualifying company within the gross assets and employee limits, outside the excluded activities
- An employee who meets the working time requirement
- Options within the individual value cap
- An exercise price at or above market value at grant, if no income tax is to arise
- Notice to HMRC by the employer, for grants since 6 April 2024 by the sixth of July after the tax year of grant
Can EMI shares qualify for Business Asset Disposal Relief
Often they can. Shares acquired through an EMI option can qualify for Business Asset Disposal Relief without the minimum shareholding that applies to other shares, provided the option was granted at least two years before the sale and the other conditions are met. The relief reduces the UK rate of capital gains tax on the gain.
GOV.UK lists those conditions. The seller must have been an employee or office holder of the company, or of a company in the same group, for at least two years up to the date of sale. The company must be a trading company or the holding company of a trading group for the same period, and the shares must have been acquired after 5 April 2013. The general rules on tax when you sell shares (opens the official GOV.UK page in a new tab) and Capital Gains Tax (opens the official GOV.UK page in a new tab) apply to the rest of the computation.
The US does not follow the relief. The US gain on sale is worked out without reference to it, and a lower UK charge leaves less UK tax to credit against US tax. Much of the economic gain may also have been taxed already by the US as compensation at exercise. A UK relief therefore does not always reduce the total a US citizen pays.
Does the IRS treat an EMI option as an incentive stock option
Usually not. US law gives incentive stock option status only to options that meet conditions in the US tax code, and EMI plans are drafted to meet UK conditions. An EMI option that does not also meet the US conditions is a nonstatutory option for US purposes, taxed under different rules.
The IRS divides options into two groups. Statutory options are incentive stock options and options under an employee stock purchase plan; every other option is nonstatutory. Publication 525 sets out the incentive stock option conditions, which include employment by the granting company or a related company from grant until shortly before exercise, and an option that cannot be transferred except on death.
A plan could in principle be drafted to meet both sets of rules, but EMI features such as discounted grants are designed around UK law. An employer granting incentive stock options issues Form 3921 (opens the official IRS page in a new tab) after each exercise, which a UK company running an EMI plan does not usually do. Our private client service reviews the plan rules and the option agreement before an award is accepted.
When does a US citizen pay US tax on EMI options
Generally at exercise. An option over private company shares has no readily determinable fair market value when granted, so nothing is taxed then. When it is exercised, the market value of the shares less the price paid is compensation income on the US return, even though the UK normally charges no income tax at that point.
If the shares received can still be forfeited or are otherwise not substantially vested, Publication 525 delays the income until they vest. The income is reported on Form 1040 whether or not any US information form is issued, measured in dollars on the date it arises. That amount, together with the price paid, becomes the US basis of the shares for the later sale, which is reported on Form 8949 (opens the official IRS page in a new tab).
Discounted grants raise a further US question. Under section 409A, an option whose exercise price is, or can become, less than the market value of the shares at grant is generally treated as deferred compensation, and a plan that fails the 409A conditions can bring an additional tax and interest. An option priced at full market value, with no other deferral feature, is generally outside the rule. A valuation agreed with HMRC and one that satisfies US rules need not be the same figure.
How is EMI income sourced when you have worked in both countries
By workdays. IRS guidance sources compensation from options on a time basis over the period to which it relates, generally from grant to the date the option becomes exercisable. The share earned by days worked outside the US is foreign-source, and only that share can support a credit for UK tax.
An IRS practice unit on multi-year compensation states that services performed after the option becomes exercisable are not taken into account. Many EMI options can be exercised only on a sale of the company, so the period may run from grant to exit and can span a move. A US citizen who worked only in the UK has foreign-source income throughout; one who moved from New York to London has a split to compute.
The arithmetic follows the same workday method as for restricted stock units, which our article on RSUs when you move between the US and the UK explains. The difference lies in what is divided. For an RSU it is the value at vest, which the UK also taxes. For an EMI option it is the spread at exercise, which the UK often does not tax, so the split matters mainly for the limitation on Form 1116.
Why the US and UK charges fall in different years
Because each country taxes a different event. The US taxes the spread at exercise as compensation and later taxes only the growth after exercise as a capital gain. The UK usually taxes nothing at exercise and charges capital gains tax on the whole growth from the exercise price when the shares are sold.
HMRC's manual sets the UK base cost as the amount paid for the shares plus any amount charged to income tax on exercise, so for a full-value EMI option the UK gain runs from the exercise price. The US basis includes the amount already taxed as compensation, so the US gain on sale is smaller. The same growth is US compensation in the year of exercise and a UK gain in the year of sale.
The foreign tax credit (opens the official IRS page in a new tab) matches foreign tax to income by category and by year. Publication 514 (opens the official IRS page in a new tab) places compensation in the general category, while gains on investment property are generally passive. UK capital gains tax may therefore find no US income of the right kind or year to offset. Unused credits can be carried back one year and forward ten within the same category, and the accrual method, covered in our post on which year takes the UK tax credit, can bring UK tax into the right US year.
Consider a US citizen employed in Manchester by a UK software startup, granted EMI options at market value and working only in the UK. On the sale of the company she exercises and sells the same day. The US taxes the spread as foreign-source compensation, with little or no US gain on sale. The UK charges capital gains tax on the whole gain, possibly with Business Asset Disposal Relief, due by 31 January after the UK tax year ends. Whether that UK tax can be credited against US tax on the compensation turns on the allocation rules for foreign tax and on the facts, which our cross-border treaty relief service works through before the exit.
Can a section 83(b) election be made for EMI options
Not for the option itself. Publication 525 states that the election cannot be made for a nonstatutory stock option. It can apply to shares received on exercise if they are still subject to forfeiture or other vesting conditions, and it must then be filed within thirty days after the shares are transferred.
That is uncommon with EMI, because most options are exercised on an exit and the shares are sold at once. It arises where an employee exercises early and the articles or a shareholders' agreement allow the company to take the shares back. The UK has its own election for restricted securities, with its own deadline, and making one does not make the other.
Both returns depend on the same facts, so keep them as they happen. Our individual tax returns service prepares the US return alongside the UK one, and the guide to US-UK tax for founders, fund managers and executives covers the other share plans and elections that follow different rules.
- The option agreement, plan rules and HMRC notification reference
- The market value agreed or used at grant, and how it was set
- A workday calendar by country from grant to the date the option became exercisable
- Exercise and sale dates, share values and exchange rates on each
- Any section 83(b) or UK restricted securities election, with proof of filing
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
