EMI Valuation: Actual Market Value and Unrestricted Market Value

An EMI option grant looks deceptively simple on paper. The company agrees a strike price with the employee; the option vests over a defined period; on exercise, the employee acquires ordinary shares; on eventual sale of the company, the gain is taxed under capital gains rules with Business Asset Disposal Relief usually available. Done properly, EMI is the most tax-efficient share scheme available to UK private companies, and the engine of share-based incentivisation in growing SMEs across the country.

Done improperly, it is also the share scheme most likely to be unwound by HMRC, costing the option-holder their tax-favoured status and dragging the company into a remedial exercise that takes months and costs money on every side. The single most common cause of EMI being unwound is the valuation. Specifically, the failure to obtain, or obtain correctly. The two valuations every EMI grant requires: Actual Market Value (AMV) and Unrestricted Market Value (UMV).

This guide is for UK SME founders, directors, finance leaders and HR teams who are running, or about to run, an EMI scheme. It explains what AMV and UMV actually are, why HMRC asks for both, how a competent valuer calculates each, the limits and tests they feed into, the VAL231 agreement process, the 90-day certainty window, the situations that trigger HMRC challenge, and the remedial steps available if something goes wrong. By the end you should know exactly what your valuer is doing on your behalf, what to look for in their report, and how to keep your scheme inside HMRC's safe harbour at every grant.

Why EMI grants need two valuations, not one

Every EMI option grant requires two valuations because the EMI legislation uses each valuation for a different job, and the two jobs require different definitions of share value.

The first valuation is Actual Market Value (AMV). AMV is the open-market value of the actual shares being placed under option, typically a small minority holding of ordinary shares in a private company, carrying real-world restrictions such as compulsory transfer provisions on leaving employment, board approval of transfers, drag-along and tag-along rules, and no liquid market on which the holder can realise the shares before an exit event. Because all of these restrictions reduce what a hypothetical buyer would pay for the shares, AMV is almost always below the per-share value implied by the company's headline equity value. AMV is the figure that sets the EMI option exercise price. The price the option-holder will eventually pay to acquire the shares. Granting at AMV means the option-holder pays no income tax or National Insurance on exercise, which is the central tax benefit of EMI.

The second valuation is Unrestricted Market Value (UMV). UMV ignores the real-world restrictions and assumes the shares are free to be sold on the open market with no leaver provisions, no transfer restrictions, no minority discount. UMV is therefore higher than AMV, typically meaningfully higher for early-stage and growth-stage UK SMEs, and only modestly higher for businesses where the equity value is dominated by control positions already. UMV is the figure HMRC uses to test the EMI limits: the £250,000 per-individual limit on unexercised EMI options at the date of grant, and the £3,000,000 company-wide limit on the value of EMI shares under option.

Submitting only one of the two numbers is not sufficient. HMRC's EMI rules explicitly require both, and the VAL231 agreement form has separate boxes for each. A valuation report that produces a single number, or that calculates AMV and UMV using the same methodology with no genuine restrictions adjustment, will not survive scrutiny and is the leading cause of HMRC EMI valuation challenges in practice.

The legal basis: TCGA 1992, ITEPA 2003 and the EMI legislation

The statutory framework for AMV and UMV sits across several pieces of UK tax legislation, and a competent valuer references all of them when building the report.

Market value generally is defined in section 272 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) as the price the asset might reasonably be expected to fetch on a sale in the open market between a hypothetical willing buyer and a hypothetical willing seller, with both parties acting at arm's length, neither under compulsion, and both with full knowledge of the relevant facts. Section 273 of the same Act sets out the additional rule for unquoted shares: the information assumed to be available to the hypothetical buyer is what a prudent prospective purchaser of those shares might reasonably require if they were proposing to purchase them from a willing vendor by private treaty and at arm's length. This is the so-called 'section 273 information set' that distinguishes private-company valuations from listed-share valuations.

For EMI specifically, the rules sit in Schedule 5 to the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). Schedule 5 sets out the requirements for qualifying EMI options, including the £250,000 per-individual and £3,000,000 company-wide limits, both measured by reference to UMV at the date of grant. ITEPA also defines 'restricted securities' for the purposes of Chapters 1 to 5 of Part 7, and the interaction between restricted securities legislation and EMI is what gives AMV its legal grounding: AMV is, in effect, the section 272 market value of the actual restricted shares being granted under option.

The practical consequence is that a UK valuer producing an AMV/UMV report is producing two formal valuations under TCGA 1992 section 272/273. One taking account of the restrictions on the actual shares (AMV), one ignoring those restrictions (UMV), and submitting them to HMRC's Shares and Assets Valuation team for agreement. The standard of evidence is the same as for any other formal HMRC valuation: methodology must be explicit, evidence must be in the report, and the numbers must withstand challenge from a specialist HMRC valuer with sector experience.

AMV in detail: the restrictions that reduce the number

AMV starts from the per-share equity value implied by the company's overall enterprise value, walks through the equity bridge to arrive at a per-share value for the actual class of shares being placed under option, and then applies a series of restriction discounts that reflect the real-world conditions attached to those shares.

The first restriction is the minority discount. A holder of, say, five percent of the ordinary share capital cannot direct dividends, force a sale, or block major corporate decisions. A hypothetical buyer of that five percent stake would pay less per share than a buyer of one hundred percent of the company, because they are buying influence rather than control. The minority discount for UK private SMEs is typically in the range of fifteen to forty percent of the pro-rata value, depending on the size of the holding (smaller holdings carry larger discounts), the rights attached to the share class, and the protections in the articles and any shareholders' agreement. For typical EMI grants. Usually single-digit-percent ordinary shareholdings with standard articles. The minority discount sits in the upper half of that range.

The second restriction is the lack of marketability discount. Even if the holder wanted to sell to a willing buyer, there is no public market for shares in a private UK company. The holder is exposed to the timing of an eventual exit event over which they have no control. The lack of marketability discount is typically applied on top of the minority discount and adds a further ten to thirty percent reduction in value, with the depth depending on how close to an exit event the company is, how liquid the secondary market for similar shares might be, and whether the articles or shareholders' agreement permit any pre-exit liquidity.

The third set of restrictions is the share-class-specific provisions: compulsory transfer rules on leaving employment (often a forced sale at a defined price for bad leavers, and at a fair-value formula for good leavers), board consent requirements for any voluntary transfer, drag-along rights that compel a minority holder to follow a majority sale, and tag-along rights that protect a minority but also constrain their freedom to sell separately. Each of these reduces what a hypothetical buyer would pay, and a competent valuer references the specific articles and shareholders' agreement to evidence each adjustment.

The cumulative effect of these restrictions on a typical UK EMI grant. A small minority of ordinary shares in a private company with standard founder-friendly articles. Is to reduce the AMV per share to somewhere between forty and seventy percent of the pro-rata UMV per share. Companies further from an exit event, with more restrictive articles, and at smaller holding sizes sit at the lower end of that range; later-stage companies with cleaner articles and larger holdings sit at the higher end. The valuer's job is to build the discount from the evidence in front of them, not to apply a standard percentage.

UMV in detail and why HMRC cares about it

UMV is the per-share value calculated as if the shares were free to be sold on the open market with no restrictions whatsoever. In practice, UMV is the headline equity value of the company divided by the fully diluted share count, with no minority discount, no lack of marketability discount, and no share-class-specific adjustments. Subject to any genuine differences in economic entitlement between share classes (for example, a non-participating preference share with capped dividend rights would carry a per-share UMV below the per-share UMV of ordinary shares, reflecting the lower economic entitlement rather than any tradability restriction).

HMRC cares about UMV because it is the figure used to test the EMI limits. The £250,000 per-individual limit caps the value of unexercised EMI options any single employee can hold at any time, measured by reference to UMV at the date of each grant. Once an employee's accumulated UMV at grant crosses £250,000, further options either fall outside the EMI regime entirely or, if the company has the right structure, fall into other share-scheme regimes with less favourable tax treatment. The £3,000,000 company-wide limit caps the total value of EMI shares under option at any time, again measured by reference to UMV at grant. Both limits are tested at the date of each grant; subsequent increases in UMV (because the company has grown in value) do not retrospectively disqualify earlier grants.

The implication for fast-growing companies is that the timing of EMI grants matters considerably. A grant made when UMV is £5 per share uses materially less of the £250,000 individual limit than the same grant made when UMV is £15 per share, even though the option-holder may end up holding the same number of shares in both cases. Founders and CFOs running EMI schemes in growth-stage businesses should therefore plan the grant cadence around the trajectory of UMV. Granting earlier rather than later if a meaningful uplift is expected, while maintaining enough headroom within both the individual and company-wide limits to support the next round of grants.

HMRC's interest in UMV is also why a deliberately low UMV. Set to suppress the consumption of the limits. Does not survive scrutiny. The valuer's UMV must be a genuine open-market valuation of the unrestricted shares, evidenced by the same financial information and the same methodology as the AMV, with the only difference being the absence of restriction discounts. Auditors and HMRC challenge teams cross-check UMV against contemporaneous funding round prices, recent third-party transactions, and the company's own internal management forecasts, and a UMV that is materially below those reference points without a clear explanation is the most common trigger for an EMI valuation enquiry.

The £250k and £3m limits, and the live-options test

The £250,000 individual limit and £3,000,000 company-wide limit are the two binding constraints on EMI scheme design, and both are measured strictly at the UMV of the underlying shares at the date of each grant.

The individual limit applies to the total UMV of all unexercised EMI options any single employee holds across all of their EMI grants. Once an option is exercised, the shares acquired no longer count against the limit, freeing capacity for future grants. Once an option lapses or is cancelled, the same freeing effect applies. Employees who exercise early in expectation of a future exit therefore create capacity for subsequent grants, which can be valuable in companies running rolling award programmes. The limit is per employer (and connected employers under common control), not per UK lifetime, so an individual moving between unconnected employers can in principle hold up to £250,000 of unexercised options at each, although in practice the second employer would refresh the planning on its own facts.

The company-wide limit applies to the total UMV of all unexercised EMI options across all employees at the time of any new grant. The £3,000,000 cap is generous for genuinely early-stage businesses but can be reached surprisingly quickly in growth-stage companies that have run an EMI scheme for several years and seen significant UMV uplift between grants. Once the cap is reached, no further EMI grants can be made until existing options are exercised, lapse, or are cancelled. Some companies operate alongside the cap by using a hybrid approach. EMI for grants that fit within the limit, and an unapproved share option scheme for grants that exceed it, although the tax position on the unapproved arm is materially less favourable.

The live-options test is essential here. Both limits look at the value of options currently outstanding, not the cumulative value of all options ever granted. A scheme that grants £200,000 of EMI to an individual in year one, sees those options exercised in year three when the company is sold, and then grants another £200,000 of EMI to the same individual in year four (under a new scheme at a new employer or after re-employment under a successor structure) would be within the limit in both cases provided each grant on its own date satisfied the £250,000 test.

How a valuer actually builds AMV and UMV

A competent UK EMI valuation report works top-down from the company's overall equity value to the per-share AMV and UMV, with every step evidenced and the methodology explicit on the face of the report.

Step one is enterprise value. The valuer establishes the company's enterprise value using the standard methods. Adjusted EBITDA times a multiple drawn from comparable transactions, discounted cash flow for businesses with strong forward visibility, or a hybrid of the two. For early-stage companies without meaningful EBITDA, the methodology shifts to revenue multiples, recent funding round prices, or a venture-capital scorecard approach, with the chosen methodology clearly justified in the report.

Step two is the bridge from enterprise value to equity value. Cash on the balance sheet is added, debt is subtracted, and any debt-like items (deferred consideration on prior acquisitions, customer prepayments, accrued employee liabilities) are deducted. The result is the equity value attributable to all shareholders.

Step three is the per-share allocation. For a company with a single class of ordinary shares, the equity value is divided by the fully diluted share count to produce the per-share UMV (before any minority or marketability adjustments). For a company with multiple share classes, typically preference shares from prior funding rounds, with liquidation preferences, dividend rights, or conversion mechanics. The valuer must allocate the equity value between the classes using a methodology that respects the economic entitlements (commonly an option-pricing model or a probability-weighted expected return method). The per-share UMV of ordinary shares in a company with senior preference shares is materially lower than a simple pro-rata calculation would suggest, and a valuer who skips this step is producing a UMV that will not survive HMRC review.

Step four is the AMV calculation. Starting from the per-share UMV of the relevant share class, the valuer applies the minority discount (with the percentage justified by reference to the holding size, the share class rights, and the protections in the articles), the lack of marketability discount (justified by reference to the company's stage and any pre-exit liquidity mechanisms), and any share-class-specific adjustments (justified by reference to the specific articles and shareholders' agreement). The result is the per-share AMV.

Step five is the limits test. The valuer applies the per-share UMV to the proposed grant size for each individual to confirm that the £250,000 per-individual limit is not breached, and aggregates the UMV of all proposed and outstanding options to confirm the £3,000,000 company-wide limit is not breached. Any breach is flagged to the company before VAL231 is submitted.

The VAL231 process and the 90-day window

Once the valuer has built AMV and UMV, the company submits the valuation to HMRC's Shares and Assets Valuation (SAV) team for agreement using form VAL231. The submission package includes the completed VAL231, the valuation report itself with all supporting analysis, the most recent statutory accounts and management accounts, the articles of association and any shareholders' agreement, a list of all current EMI option-holders and any other share-scheme participants, details of any recent funding rounds or share transactions, and any other information the valuer believes the SAV team will reasonably want to see.

HMRC's SAV team reviews the submission, typically within four to eight weeks for straightforward cases and longer for complex multi-class structures. If the team accepts the valuation, the company receives a letter confirming the agreed AMV and UMV. From the date of that letter, the agreed values are valid for ninety days for the purpose of granting EMI options. Grants made within the ninety-day window using the agreed values are protected from later HMRC challenge on the valuation itself (although other aspects of the grant. Qualifying employee status, working time requirements, scheme rules. Remain open to scrutiny).

Grants made outside the ninety-day window, or grants made before agreement is received, are still legally valid provided the company can demonstrate that the values used were genuine open-market valuations under TCGA 1992 section 272/273. But the safe harbour of an agreed valuation is lost, and HMRC can challenge the values at a later date, typically when an exit event occurs and a routine compliance review takes place. Companies that grant outside the window expose option-holders to potential income tax and National Insurance liability years after the grant, which is the most damaging outcome possible for an EMI scheme.

The practical discipline is to align EMI grant rounds with the ninety-day window. Companies running regular grant programmes (annual or quarterly) typically refresh the valuation each cycle. Companies running occasional grants typically obtain a fresh valuation immediately before the grant batch. In both cases the timing of the VAL231 submission is planned backwards from the intended grant date to leave comfortable headroom within the ninety-day certainty window.

What triggers HMRC challenge

HMRC SAV does not challenge every EMI valuation, and most well-prepared submissions go through without comment. The cases that do trigger challenge share a small number of identifiable features.

The first trigger is a material gap between UMV and a recent funding round price. If the company raised investment at a per-share price of £8 six months before the EMI grant, and the EMI valuation produces a per-share UMV of £4, HMRC will ask why. There may be legitimate reasons. The funding round shares were preference shares with downside protection that the ordinary shares lack, the company's trading has deteriorated materially since the round, or specific structural changes have reduced the value of the ordinary equity. But the explanation must be in the report. A UMV that is materially below a recent funding round price without a clear explanation is the single most common reason for an HMRC EMI enquiry.

The second trigger is an unusually large discount between UMV and AMV. Discounts of forty to sixty percent are common; discounts above seventy percent are unusual and require strong evidence. A report that applies a ninety percent combined minority and marketability discount without specific justification will draw scrutiny, particularly if the holding sizes being granted are not at the very smallest end of the spectrum.

The third trigger is methodology that is opaque or internally inconsistent. Valuations that switch methodology between AMV and UMV without explanation, that use different base equity values for the two calculations, or that apply discounts without referencing the specific articles and agreements are flagged for review. The remedy is a report that walks through every step explicitly and shows the calculation working at each stage.

The fourth trigger is the company's profile. Companies in sectors with active HMRC scrutiny (technology businesses with significant intellectual property, companies that have benefited from recent R&D tax credits, companies with related-party transactions), companies with complex multi-class share structures, and companies that have changed valuer between grants without clear reason all attract a slightly higher review intensity. None of this prevents a clean valuation from being agreed, but it raises the bar on documentation.

What happens if AMV is wrong: the option-holder consequences

If HMRC successfully challenges the AMV used for an EMI grant. Either at the time of agreement or, more commonly, years later when an exit event triggers a compliance review. The consequences fall primarily on the option-holder rather than the company, and they can be severe.

The central tax advantage of an EMI option is that no income tax or National Insurance arises on grant or exercise, provided the option is granted at an exercise price at least equal to AMV at the date of grant. If HMRC determines that the true AMV at grant was higher than the exercise price used, the difference between the corrected AMV and the exercise price is treated as a discount given to the employee at grant. The discount is then subject to income tax and employee's National Insurance at the date of exercise, with employer's National Insurance also payable. For an option that has appreciated substantially between grant and exercise, the income tax charge can run into tens or hundreds of thousands of pounds per option-holder.

There is some statutory protection. If the AMV used at grant was a value agreed in writing with HMRC under the VAL231 process, the agreed value is binding for ninety days and grants made within that window using that value cannot be retrospectively challenged on the valuation itself. This is why operating within the ninety-day window is so important. It is also why companies that grant outside the window expose their option-holders to risk that may not crystallise for years but, when it does, is unpleasant for everyone involved.

The company-side remedy is limited. If a grant is later found to have used too low an AMV, the company can pay the employer's National Insurance on the income tax charge but cannot retrospectively fix the option terms. In some cases the company chooses to compensate the affected option-holders for the income tax charge through a gross-up arrangement, but this is a commercial decision rather than a legal obligation. The best protection is to get the AMV right at grant, evidenced by an agreed VAL231, and to refresh the agreement before each grant cycle.

Refresh discipline, funding rounds and corporate events

AMV and UMV are point-in-time valuations. They are valid for the ninety-day window following HMRC agreement, but the underlying economic value of the company continues to change in real time, and any material event between agreement and grant can invalidate the use of the agreed values for further grants.

Funding rounds are the most obvious triggering event. A new equity investment at a higher per-share price than the previously agreed UMV makes the existing UMV stale by definition. Companies that complete a funding round mid-window should obtain a fresh valuation before any further EMI grants, even if grants earlier in the window were validly priced. The same applies to any third-party share transaction at a price materially different from the agreed UMV.

Other events that invalidate an agreed valuation include material acquisitions or disposals, significant new contracts that change the trading outlook, changes to the articles or shareholders' agreement that alter the rights of the share class being granted, share buybacks that change the share count or class structure, and bonus issues or share splits that change the per-share economics. The competent practice is to maintain a checklist of events that trigger a fresh valuation, and to refresh proactively rather than waiting for HMRC to raise the issue at exit.

For companies running annual or semi-annual EMI grant programmes, the simplest discipline is to refresh the valuation every grant cycle regardless of whether a triggering event has occurred, on the basis that the cost of a fresh valuation is small relative to the cost of having a grant unwound years later. For companies running occasional ad-hoc grants, a fresh valuation immediately before each grant batch is the right standard.

Interaction with EMI exit: how AMV and UMV connect to sale proceeds

At the point of exit, typically a sale of the company to a trade or financial buyer. The EMI option-holders exercise their options (if they have not already done so) and sell the resulting shares to the buyer. The tax outcome at exit is governed by the gap between the exercise price (set at AMV at grant) and the sale price (the per-share consideration paid by the buyer), with any gain taxed under capital gains rules.

Where the option was granted at AMV at grant, the entire gain from exercise price to sale price is a capital gain. Where Business Asset Disposal Relief (BADR) is available, which generally requires the option-holder to have held the option for at least two years before exercise, and the company to have been a trading company throughout. The gain is taxed at fourteen percent up to the £1m lifetime allowance from April 2026, with gains above that amount taxed at the main capital gains rate. The two-year holding period requirement is one reason why early EMI grants in growth-stage companies are particularly valuable: the option-holder's two-year clock starts at grant rather than at exercise, so options granted well in advance of a potential exit are eligible for BADR even if exercised close to the exit date.

Where the option was granted at an exercise price below AMV at grant (commonly called a discounted EMI), the discount element is taxed as income at exercise, with the remaining gain from grant-date AMV to sale price taxed as a capital gain. Discounted EMI is permitted under the EMI rules but reduces the tax efficiency of the scheme, and is typically used only where there is a specific commercial reason, for example, granting at a nominal exercise price to align incentive with founder equity.

The interaction between EMI exit and the company sale process is administratively complex. The company's lawyers will run a share option compromise mechanism alongside the share sale, the option-holders will exercise simultaneously with completion, the sale proceeds will be distributed pro-rata, and the company will operate PAYE on any income tax element. Sellers planning an exit should work through the EMI mechanics with their advisers well before signing heads of terms so that the option-holder treatment is fully reflected in the deal structure.

Multi-class share structures and the option-pricing allocation

Companies that have raised investment from external shareholders typically have multiple classes of share. Ordinary shares held by founders and EMI option-holders, and one or more classes of preference share held by investors with liquidation preferences, dividend rights and anti-dilution mechanics. Valuing the ordinary shares in such companies for EMI purposes requires more than a simple pro-rata allocation of equity value across the share count; it requires allocating equity value between classes in a way that respects the economic entitlement of each.

The standard methodology is an option-pricing model (OPM), typically a Black-Scholes-based allocation, that treats each class of share as a series of call options on the company's total equity value at different exit scenarios. The preference shares get the value below their liquidation preference threshold; the ordinary shares get the value above. The result is a per-share UMV for ordinary shares that is meaningfully below the per-share UMV of preference shares, reflecting the lower economic entitlement of ordinary shares in downside and modest-upside scenarios.

An alternative is the probability-weighted expected return method (PWERM), which models specific exit scenarios (IPO, trade sale at multiple price points, wind-down) with assigned probabilities, and weights the per-share value across the scenarios. PWERM is more transparent than OPM for management teams to follow but requires more subjective assumptions. HMRC SAV accepts both methodologies provided the report explains the choice and shows the working. Valuers who skip this step entirely. Applying a simple equity value divided by share count. Produce UMVs that overstate the value of ordinary shares and consume the EMI limits faster than necessary, leaving headroom on the table.

Working with your valuer and your accountant

EMI valuations sit at the intersection of valuation methodology, tax law and company law, and the best outcomes are produced when the valuer, the company's accountants, and the company's lawyers work together rather than separately. The valuer produces the AMV and UMV report and runs the VAL231 process. The accountant provides the underlying financials and ensures that the management accounts presented to the valuer are consistent with the statutory accounts. The lawyer drafts or reviews the EMI scheme rules, the option agreements, and any amendments to the articles required to support the scheme.

What founders and CFOs should look for in a competent EMI valuer is straightforward: deep experience with UK private-company valuations specifically (not just general M&A advisory), a track record of agreed VAL231 submissions, a report format that is methodology-explicit and shows all working, a working relationship with HMRC SAV that supports responsive dialogue when questions arise, and pricing that reflects the work rather than the company's size. Fixed-fee EMI valuation engagements at sensible price points are widely available; valuations priced as a percentage of equity value are not the market standard for EMI and should be avoided.

The single most important step a company can take to keep its EMI scheme inside HMRC's safe harbour is to treat the valuation as a recurring discipline rather than a one-off exercise. Refresh the valuation each grant cycle. Submit VAL231 in good time. Grant inside the ninety-day window. Document each grant with the agreed values on the file. And keep the records for the lifetime of the option plus the statutory record-keeping period beyond exit. Done this way, EMI continues to deliver the tax efficiency it is designed for, and option-holders receive the cash they expected on exit without an unwelcome HMRC letter years later.