EMI Share Options and Property Companies: Why the Excluded Activities Rule Blocks Developers

A growing development company wants to keep its site managers, project leads or a JV partner's key people locked in for the long haul, so someone suggests EMI options — the most tax-efficient way to give staff equity anywhere in the UK. Then the accountant delivers the bad news: property development is one of a handful of activities Parliament specifically excluded from the scheme, and no amount of commercial risk or genuine trading activity changes that.

What makes EMI worth wanting in the first place

Enterprise Management Incentives is the most generous of the UK's tax-advantaged share schemes. Options can be granted with no Income Tax or National Insurance charge at grant, no charge on exercise provided the exercise price is at least market value on the grant date, and the eventual gain on sale is taxed as a capital gain rather than employment income. EMI shares also get privileged access to Business Asset Disposal Relief — the normal 5% shareholding test is waived, and the two-year minimum ownership period is measured from the date the option was granted, not the date it was exercised, so a company can be sold within two years of an employee actually holding shares and BADR can still apply.

Set against unapproved options, where the whole gain is taxed as employment income and both employer and employee National Insurance can bite, the gap in outcome is substantial. That gap is exactly why EMI eligibility questions come up early in almost every conversation about incentivising a development team.

The limits that usually aren't the problem

Before activity is even considered, a company has to meet a set of size and structure conditions: unexercised options worth no more than £250,000 per employee, a company-wide cap of £3 million of unexercised EMI options, gross assets of no more than £30 million, fewer than 250 full-time equivalent employees, and genuine independence — broadly, the company can't be a 51%-plus subsidiary of another company or under someone else's control. Most SME development businesses clear all of these comfortably. The condition that actually stops them is a different one entirely.

The excluded activities test

To qualify, the company (or the group, where relevant) must carry on a qualifying trade — and the legislation sets out a specific list of activities that don't count, however commercially real and risky they are. The excluded activities list includes dealing in land, commodities or shares; banking, insurance, money-lending and other financial activities; leasing assets or receiving royalties and licence fees; providing legal or accountancy services; running hotels or care homes; farming; and, most relevantly here, property development itself.

A company fails the test if its trade consists wholly or substantially of one or more excluded activities. HMRC doesn't apply a precise statutory percentage, but in practice treats "substantially" as somewhere around 20% or more of the business, judged by a reasonable measure such as turnover, asset value or staff time. The effect is blunt: a company whose business is buying land, developing it and selling or letting the completed units cannot grant EMI options at all, no matter how it structures the paperwork, how large its balance sheet is, or how much genuine commercial risk the business is carrying.

Why HMRC draws the line here

EMI was designed to help small, higher-risk trading companies attract and retain talent when they can't compete on cash salary — the classic case being an early-stage operating business. Parliament's excluded activities list broadly reflects a judgement that asset-holding, dealing and property-related activities are lower risk and more capital-driven than the kind of trading EMI was meant to support, even where that judgement doesn't map neatly onto how risky a live development scheme actually feels to the people carrying the debt. There's no appeals process for this — it's a bright-line legislative exclusion, not a facts-and-circumstances test HMRC can be argued out of.

Where the grey areas actually sit

Very few development businesses are purely one thing, and this is where advice earns its keep. A company that carries out genuine third-party construction or project management work — charging fees to build out other people's schemes, rather than developing its own land for its own account — is running a different kind of trade, and may well pass the test even if it sits in the same group as land-holding SPVs. Groups that separate a fee-earning construction or management company from the SPVs that actually hold and develop land sometimes find the fee-earning entity qualifies for EMI in its own right, while the SPVs never could. Getting this right means mapping exactly what each company in the structure does, not assuming the group's overall reputation as "a developer" settles the question one way or the other.

The safest way to test the position before making any promises to staff is HMRC's advance assurance process, which gives a company confirmation of qualifying status before options are granted. Given how often this catches groups out after they've already told a site manager "we'll sort you out with options," checking first is considerably cheaper than unwinding a promise.

What works instead

Property companies that fail the EMI test aren't left with nothing — they're left with less favourable, but still usable, tools.

• Company Share Option Plan (CSOP) — a second tax-advantaged scheme with no excluded activities test at all, so property development and land-dealing companies can use it freely. The per-employee limit is lower, at £60,000 of unexercised options (doubled from £30,000 in April 2023), and there are share class and "worth having" conditions to satisfy, but the same broad shape applies: no Income Tax or NIC on exercise if options are held for at least three years and exercised at or above the price fixed at grant, and CGT treatment on eventual sale.
• Growth shares — an unapproved arrangement, but one without any statutory trade restriction. A new class of ordinary shares is issued with a "hurdle" set above the company's current value, so the employee only participates in growth above that hurdle. Priced correctly at the point of issue, this avoids an upfront Income Tax charge on acquisition and converts the eventual value into a capital gain. The trade-off is that it depends entirely on a defensible valuation at issue, and carries none of EMI's automatic statutory certainty.
• Unapproved options — the simplest route, available to any company regardless of trade, but the least tax-efficient: the gain on exercise is taxed as employment income, with employer and employee National Insurance both potentially due.
• Profit share or "promote" arrangements — common in development joint ventures to reward the individuals driving a scheme, structured as a share of profit on the specific project rather than equity in the company. These need careful drafting to avoid being caught by the disguised remuneration or employment income rules if the individual is also an employee.

What this means in practice

If a development company is planning to offer equity or options to key staff, the trade classification question needs answering before any promises are made, not after the paperwork is drawn up. Get the group structure mapped properly, check whether any entity in it genuinely sits outside the excluded activities list, and use HMRC's advance assurance process to confirm the position rather than assume it. Where EMI genuinely isn't available, CSOP and growth shares both give a property company real, tax-efficient options — just not the same ones a software company down the road gets to use.

Common questions

Can a property development company grant EMI share options?

Generally no. Property development is listed as an excluded activity under the EMI legislation, so a company whose trade consists wholly or substantially of property development cannot qualify for EMI, regardless of its size, turnover or how much genuine commercial risk it carries.

Why is property development excluded from EMI?

EMI is targeted at higher-risk trading companies, and the legislation carves out a list of activities Parliament decided shouldn't qualify, including dealing in land, property development, leasing, and other financial or asset-based activities considered lower risk than an operating trade, even though property development is commercially risky in practice.

What is the excluded activities test for EMI?

A company only fails the test if its trade consists wholly or substantially of one or more excluded activities, which HMRC generally treats as roughly 20% or more of the business by a reasonable measure such as turnover, asset value or time spent. A company that does some development alongside a genuinely separate qualifying trade may still pass, but it needs careful analysis rather than assumption.

What are the alternatives to EMI for a property company?

A Company Share Option Plan (CSOP) has no excluded activities test and can be used by property companies, offering similar Capital Gains Tax treatment up to a lower £60,000 per-employee limit. Growth shares and unapproved options are also available, converting future value growth into a capital gain without a statutory trade restriction, though without EMI's automatic tax-advantaged certainty.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

← All articles