Exercising caution: Discretion in EMI and CSOP employee share plans and the PISCES opportunity

In brief: 

• In EMI and CSOP schemes, any material changes after grant, including exercising discretion beyond original plan terms, can cause loss of tax-favoured status. 
• Broad discretionary powers in older plans risk unintended tax charges if exercised outside explicitly defined parameters. 
• The new PISCES platform enables private company share sales but will not fall within the definition of ‘Exit Event’ in legacy plans, using a broad discretion to introduce a new exercise event could trigger a loss of tax-advantaged status. 
• Companies can now carefully update historic EMI/CSOP agreements to specify PISCES as an exercise trigger without losing tax relief—provided strict conditions are met and precise wording is used. 
• Companies should review existing plans, update documentation, and secure written agreement from option holders to access PISCES benefits and avoid tax risks. 

For businesses deploying Enterprise Management Incentives (EMI) and the Company Share Option Plan (CSOP) to incentivise and retain talent, preserving the intended tax advantages of those statutory UK plans requires care, especially when it comes to the use of discretion in plan administration. 

Following changes to HMRC guidance, this is an area that is already under close scrutiny when it comes to transaction due diligence. A new development also means some companies should soon update their existing share plan documents. This article sets out a reminder of the current regime and explains the incoming changes.  

The general position on discretion 

The terms of a tax-advantaged share option must be fixed at grant. Material changes later, such as adding new exercise triggers, result in a deemed re-grant (EMI) or release and re-grant (CSOP), stripping the award of its tax-favoured status.  

Older plans, especially those that pre-date HMRC's updated guidance, may provide a wide power of discretion to the Board. It is not the existence of such discretion wording that is problematic, but the exercise of that power, other than in limited circumstances. If the original award and its tax-advantaged status are to be preserved, then the exercise of discretion is only "acceptable" where it operates within the parameters explicitly set out at grant. 

Some examples of discretion use 

A few examples are listed below but there are many more circumstances and each case will need to be reviewed and considered based on the facts, legislation and guidance.  

Why it matters 

Provisions regarding use of discretion must be well defined at the outset, either in the plan rules or the individual grant agreement. Professional advice should be sought to ensure that the award documents deliver the outcomes sought and cater, specifically and explicitly, for all circumstances where use of discretion may need to apply. 

Advice should again be sought before exercising a power of discretion, to mitigate risk of unexpected income tax and National Insurance Contribution (NIC) charges arising. Triggering an unexpected (and therefore unfunded) employer NIC liability could be particularly damaging where the award documents have not also provided for that contingent expense to be transferred to the option holder as a condition of exercise.   

The Private Intermittent Securities and Capital Exchange System (PISCES): A new opportunity 

The incoming PISCES platform introduces structured trading windows for private company shares, enabling secondary share sales via auction. While potentially valuable for liquidity, HMRC has confirmed that adding PISCES as an exercise trigger through a blanket general discretion in legacy plans is not permitted and would result in a loss of tax relief. 

July 2025 draft legislation: A tailored exception 

On 21 July 2025, the Government published draft legislation to allow existing EMI and CSOP agreements to be explicitly amended to include PISCES as a specified exercise event - without losing tax-advantaged status. There are, however, strict conditions: 

1. The option must have been granted on or before Royal Assent of the Finance Bill 2025-26 (which is due in spring 2026); 
2. The variation must occur on or after 15 May 2025; 
3. The sole effect of the change must be to allow exercise only when shares are traded (and immediately sold) on PISCES; and 
4. The change must be carried out via written agreement with, or written notification to, the option-holder.  

Provided all these conditions are met, HMRC will treat the variation as if it had existed at grant, preserving EMI/CSOP treatment. Moreover, HMRC has indicated it will not pursue tax on qualifying amendments made in advance of Royal Assent.  

Actions to consider  

Boards should now: 

• Review existing EMI/CSOP agreements and any historic use of discretion to identify any latent tax risk; 
• Update plan rules and award agreements for new grants yet to be awarded, ensuring that discretionary powers are suitably drafted (including PISCES exercise rights explicitly from the outset if there is any prospect that the company may wish employees to gain share liquidity via that platform); 
• If PISCES is to be facilitated for historic awards, prepare written amendments that meet the draft legislation’s criteria. Professional advice should be taken both in relation to the drafting and timing for implementing the changes; and 
• Engage with option-holders early to secure written agreement or to notify them of amendments effectively. 

Discretion in EMI and CSOP schemes is a delicate tool, effective when used within the confines of clearly drafted rules, but dangerous when stretched to accommodate unanticipated events. The forthcoming PISCES legislation offers a rare statutory carve-out for those who plan ahead and act with precision.  

For more information or assistance with the actions outlined above, contact: Liz Hunter, Partner (non-lawyer) Incentives.