The best share scheme in Britain is an ordinary option in America

Figures relate to tax year 2025-26 (UK) · 2025 (US)

Your startup granted you options under the enterprise scheme, and everybody in the room treated it as the best news of the year. In British terms it genuinely is.

Granted at market value there is usually no tax when you exercise, and a reduced rate can apply when you sell. America has never heard of the scheme. EMI options are simply options there, and the usual American rules apply in full.

Key takeaways

• EMI options can carry no British tax on exercise where the grant was at market value.
• America taxes the spread at exercise as ordinary compensation income.
• That creates a tax bill in a year with no cash to pay it.
• The British reduced rate on sale has no American equivalent.
• Social security treatment differs on each side as well.
• Timing the exercise is the main lever you still control.

What is an EMI option scheme?

EMI options are share options granted under a British scheme for smaller trading companies, designed to reward staff without an immediate tax charge. According to HMRC guidance, options granted at market value usually produce no income tax or National Insurance when the holder exercises.

The company must qualify on size, trade and independence.

For a British employee it is close to the most favourable arrangement available.

How does America treat the same grant?

As a plain non-qualified option in almost every case, because EMI options meet none of the American conditions. So the difference between what you pay and what the shares are worth becomes ordinary income at exercise.

That income sits alongside your salary and attracts your marginal rate.

No British tax arises at that moment, so no credit is available either.

Why is exercise the painful moment?

Because the tax falls due before any money exists. Exercising turns options into shares, and in a private company those shares cannot be sold, so you owe American tax on a paper gain with nothing to fund it.

British employees face no equivalent charge at that point.

That mismatch is the single biggest issue with EMI options for Americans.

A worked example

The figures below are illustrative and use round numbers to show the mechanics.

Anna is American and works for a London software company. She holds EMI options over 50,000 shares at an exercise price of £0.20, granted when that matched market value.

Four years later the shares are worth £3.00 each. She exercises, paying £10,000 for shares worth £150,000.

Britain charges nothing. America sees £140,000 of compensation income, roughly $175,000, taxed at her marginal rate in a year when she cannot sell a single share.

The two systems compared

What happens when you finally sell?

Britain taxes the whole gain from the exercise price, potentially at a reduced rate where the conditions are met. America taxes only the growth since exercise, because it already taxed the spread.

So the two countries measure the gain from different starting points.

Record the exercise date value carefully, since it is your American cost basis.

British tax paid on sale can then credit against the American charge on that slice.

Can you time the exercise better?

That is the main lever available. Exercising early, when the shares are worth little more than the exercise price, keeps the American spread small and starts the clock on long term capital gains.

The risk is paying for shares that may never be worth anything.

Partial exercises across several years can spread the charge usefully.

Exercising at exit removes that risk and maximises the American charge.

What about exercising on a sale of the company?

Very common, and simplest from a cash point of view because the shares are sold the same day. The American charge is at its largest, but the money to pay it arrives at the same moment.

Everything becomes compensation income in that single year.

That can push you into the top bracket for the whole of it.

Does National Insurance or social security apply?

Britain usually charges neither on a qualifying exercise. America can treat the spread as wages for its own social security purposes, which adds to the cost unless a coverage certificate protects you.

Our guide to the certificate of coverage covers that protection.

Check it before exercising rather than after.

How to plan around it

1. Find the grant date, exercise price and market value at grant.
2. Establish the current market value of the shares.
3. Calculate the American charge if you exercised today.
4. Compare that against exercising at a future exit.
5. Check whether you can fund the tax without selling shares.
6. Confirm whether a coverage certificate protects the social security side.
7. Decide the exercise date deliberately rather than by default.

Does the company have to do anything?

It reports the grant and exercise to HMRC in the ordinary way, and that is usually the end of its involvement. The company rarely withholds American tax, because it has no American payroll.

So the liability lands on you to settle directly.

Build a payment on account into the year you exercise.

What if the company is a foreign fund risk?

Shares acquired through EMI options in an ordinary trading company are usually fine, but a company holding mostly cash or investments can fall under the punitive American fund rules. A startup sitting on an unspent raise is the classic case.

Our guide to the ISA and PFIC problem explains the regime.

Ask what the company actually does with its money.

What about leaving before exit?

Most EMI options give you a short window to exercise after leaving, often ninety days, and failing to act usually forfeits them entirely. That forces an exercise decision at an awkward time.

The American charge arrives whether or not you can sell.

Work out the number before you resign, not afterwards.

Does moving back to America change things?

The British side can change considerably, since your residence at exercise and again at sale both matter there. The American side follows you regardless, because citizenship rather than where you live drives the obligation.

A move between grant and exercise usually needs apportioning.

Our guide to US-UK share schemes covers the apportionment.

Can the company help with the cash?

Some arrange a cashless exercise at exit, selling just enough shares to cover the exercise price and the tax. A few will lend against the shares instead, though most small companies simply cannot fund that.

Ask early, because these arrangements take time to set up.

A company that has had American staff before usually knows the problem.

What records should you keep?

The option agreement, the grant notice showing the exercise price, the valuation used at grant, and the exercise paperwork with the date and market value. Those four drive every calculation on both returns.

Keep the company valuation reports alongside them.

Years later nobody can reconstruct a private company price.

Does an exit price change the analysis?

Only the size of it. A higher price means a larger American spread at exercise and a larger British gain on sale, but the structure of the charge stays the same throughout.

Deferred consideration adds timing questions of its own.

Earn-outs in particular need looking at separately.

What if the options are underwater?

Then nothing happens on either side, because an option worth less than its exercise price produces no spread and no gain at all. You simply let it lapse when the window closes.

Lapsing gives you no loss to claim either.

Americans get no deduction for an option they never exercised.

Does a secondary sale count as an exit?

It can, where a funding round lets employees sell some shares to the incoming investors. That gives you cash without a full exit, which makes funding the American charge on exercise considerably easier to manage.

The British treatment of a secondary differs from a trade sale.

Check both before agreeing to take part.

What about options granted before you moved?

Those usually need apportioning, because the award was earned partly outside the period you were in Britain. Each country looks at where you worked across the vesting period rather than only at the exercise date.

Payroll almost never handles that split correctly.

A simple year by year note of your work location settles it.

Keep a record of where you were based each year.

Do you need to tell your employer you are American?

Yes, and early. They will not advise on American tax, but knowing that it applies changes what they flag to you and whether they consider a cashless arrangement when an exit eventually arrives.

Companies with several American staff often set one up.

One conversation at grant saves a difficult one at exercise.

How does it compare with a cash bonus?

A bonus is taxed in both countries with a credit available, which is simpler and often cheaper for an American than the option route. The upside is obviously far smaller, so the comparison turns on how much the company grows.

Options still win where the company grows substantially.

Price both before assuming equity is the better deal.

What if the company fails after you exercise?

You will have paid American tax on a spread that turned out to be worthless, and the later loss is a capital loss rather than a refund of that income tax.

Capital losses offset gains first, with a small annual amount against income.

That asymmetry is the real risk in exercising early.

Does the grant valuation matter later?

Enormously, because it sets the exercise price and therefore the size of every charge that follows. An agreed valuation with HMRC at grant gives both countries a defensible starting figure to work from.

Keep that agreement with the option paperwork.

Reconstructing a private company value years later rarely convinces anyone.

Mistakes and penalties we see with EMI options

The first is exercising EMI options on the British arithmetic alone. The British answer is almost always nil, and that tells you nothing.

The second is exercising without the cash to pay the American tax.

The third is missing the payment on account and picking up an underpayment charge.

The fourth is assuming the reduced British rate on sale applies to the American gain as well. It does not.

How US UK Tax Accountants helps

We price the American charge on your EMI options at several exercise dates so you can see what each choice costs, check the social security position, and set up the payment so no penalty builds. Then we prepare both returns for the year.

Where you have already exercised, we make sure the basis is recorded for the eventual sale. Our treaty relief service covers the wider planning.

If you hold options and an exit is coming, get in touch. Everything useful here happens before you exercise.

Last reviewed 3 October 2026. This article is general information and not personal tax advice. Every scheme turns on its own facts, so take advice on yours before exercising.