Entrepreneurs’ relief to apply to EMI shares

Michael Deeks, Tax Partner, Olswang

Changes to the scope of Enterprise Management Incentives (“EMI”) options have been announced today which will expand the way in which employees can benefit from EMI options.

Entrepreneurs’ relief is currently available to employees and directors who realise “qualifying gains” in respect of shares held in their employing company (or a member of its group). If an individual is eligible for the relief then a 10% rate of capital gains tax is applied in respect of the disposal of such shares up to a lifetime limit of £10 million. Currently, in order to obtain “qualifying gains” in respect of the disposal of his shares, an employee/director must have held at least 5% of the ordinary share capital of the company (and be able to exercise at least 5% of the voting rights in the company) throughout the period of twelve months prior to the date of the sale.

Following today’s announcements we have spoken to several HMRC inspectors who have confirmed that, subject to resolution of the finer details, the holders of shares which have been acquired pursuant to EMI options will be able to benefit from the extremely favourable 10% rate without needing to satisfy the current 5% holding requirement. To be clear, we understand that individuals will still need to have held the shares acquired on exercise of their EMI options for a 12 month period prior to sale.

Many companies have entered into arrangements that allow employees to acquire a class of shares that provides them with 5% or more of the share capital and votes in a company but less than 5% of the economic interest (i.e. less than 5% of the proceeds on a sale of the company) in order that these employees can benefit from entrepreneurs’ relief if they remain employed and hold the shares for at least 12 months. For EMI eligible companies, it appears that this will no longer be necessary as the company could grant immediately exercisable EMI options without the need to give employees at least 5% of the voting rights in the company. In addition, unlike in respect of a direct subscription of shares, HMRC will agree the market value of a share before an EMI option is granted. Using EMI options will therefore avoid situations where an employee subscribes for shares without knowing whether those shares are being acquired at a discount to their market value and therefore whether a tax charge will be triggered.

We have been informed that details of these amendments will be published in Autumn 2012 and will operate retrospectively in relation to shares acquired pursuant to EMI options exercised on or after 6 April 2012. Further details on the proposed measures are expected in due course and we will publish updates as information becomes available.

So far we have not seen any other changes to the current rules relating to entrepreneurs’ relief.

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