The Enterprise Management Incentive (EMI) scheme is an approved statutory share option scheme. A qualifying share option scheme offers employees (known as ‘granting the option’) the opportunity to purchase shares at a later date, generally at the market value prevailing at the date of the original offer. When the shares are actually purchased, this is known as exercising the option. As EMI is a tax advantaged scheme this generally means there is no income tax or National Insurance liability when the options are granted nor when the shares are exercised and the shares acquired. Instead, on a disposal of the shares any profit made is charged to capital gains tax which would probably be at the 28% rate in many circumstances. The scheme is intended to help qualifying trading companies recruit and retain key employees and is available where a company’s gross assets do not exceed £30 million.
In Budget 2012 the Government announced its intention to relax the Entrepreneurs’ Relief (ER) rules for capital gains tax in so far as they affect EMI shares so that they can easily qualify for the relief on a disposal by an employee of the company. This would mean that any resulting gain will be taxed at 10% as long as certain conditions are met.
ER before the changes
The current ER rules require that throughout the period of 12 months immediately preceding the disposal:
- The claimant held a minimum 5% of the ordinary shares in the company and
- The company was a trading company or the holding company of a trading group and
- The claimant was an officer or employee of the company or one of the trading group companies.
In many cases employees with EMI acquired shares would not qualify under the 5% minimum ownership rule. In addition ER is only available on shares owned for 12 months and ignores the time the option is held. In many option situations, shares are sold shortly after acquisition.
The proposed changes
Legislation will be introduced in Finance Bill 2013 and will apply to eligible shares acquired on or after April 2012 that are disposed of on or after 6 April 2013.
- The requirement that the person must hold a minimum of 5% or more of the ordinary share capital in the company will be removed.
- Additionally, the 12 month minimum holding period requirement will include the period the option is held.
The impact of this is to further enhance the tax advantages of the EMI scheme to promote such schemes to small and medium sized enterprises.
If you would like to discuss if the EMI would be of value to your business and the conditions which need to be satisfied to implement such a scheme please contact us for further advice.