Extension of Entrepreneurs relief to EMI Options

An Enterprise Management Incentive Scheme (more commonly known as an EMI Scheme) is an HMRC approved share incentive scheme providing certain tax advantages which are intended to enable companies to incentivise their employees by offering them shares in the company in a tax efficient manner.

Current law surrounding Entrepreneur’s Relief require shares acquired pursuant to an EMI option to have been held for at least 12 months and also represent at least 5% of the ordinary share capital or voting rights of the company to qualify for the relief.  Qualifying for Entrepreneur’s Relief would result in any capital gain on the sale of those EMI shares being taxed at a 10% rate.

Last year George Osborne announced plans to extend Entrepreneur’s Relief to EMI option shares where the employee holds less than 5% of the shares or voting rights.  It was initially expected that no other changes would apply however, in the draft legislation to enact the change (published in December 2012) there is also a relaxation of the 12 month period that such shares would need to have been held by the employee prior to their disposal in order for Entrepreneurs Relief to apply.

According to Neil Jones, commericial solicitor with Ansons LLP in Cannock, this could be of major benefit to many small businesses seeking to find ways of incentivising their highly valued employees in the current and extremely difficult financial climate but without wanting to give away any shares in the Company until it is actually sold.

The 12 month period required in order to qualify for Entrepreneur’s Relief will run from the date the EMI option is granted and not the date when the option was exercised and the shares issued.  The requirement for the employee to actually hold the shares for at least 12 months would no longer apply and in circumstances where the EMI option has been held for 12 months or more it can simply be exercised immediately prior to a sale of the company as opposed to at least 12 months prior.

Whilst these relaxations will only apply to EMI share options which were granted after 5th April 2012 and in respect of share sales which take place after 5th April 2013 we believe that these relaxations offer owner managed businesses a real opportunity in this economic climate to offer valuable incentives to key employees without the burden of having to give away any shares until the ultimate sale of the company itself.

For advice on EMI Schemes please contact Neil Jones in the commercial law team on 01543 431184 njones@ansonsllp.com.