Steven Mugglestone

The more I learn, the less I know

Improvement to the Enterprise Management Incentive Scheme?

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In his last budget, the Chancellor announced changes to the Enterprise Management Incentive (EMI) scheme.

EMI share options awarded at market value are a tax-efficient way to incentive employees of a small or medium sized businesses as there is no tax or national insurance due on the grant or exercise of the options, with employees only paying capital gains tax (CGT) when they come to dispose of their EMI shares.

The first proposed change will increase the amount of EMI options an individual can hold from £120,000 to £250,000.  Therefore, an amount of up to £250,000 of share options can be granted to an employee with effect from 16 June 2012.

It was also announced (again subject to state aid approval but expected to be introduced in Finance Bill 2013) that an individual who sells shares acquired from the exercise of an EMI option will be entitled to Entrepreneurs’ Relief (ER).

At the present time, an individual benefits from ER when he meets the following three conditions throughout an ownership period of at least one year.

  1. The company must be the individual’s ‘personal company’ (i.e. he holds at least 5% of the ordinary shares and voting rights.)
  2. The company must be a trading company or the holding company of a trading group.
  3. The individual must be an officer or employee of the company or a group company.

The proposed change for those holding EMI shares will remove the first condition so that an individual will not need to meet the ‘personal company’ test to qualify for ER on an eventual sale.  (Therefore, he will not need to hold 5% of the ordinary shares and voting rights although the other conditions will still apply.)

In order to qualify for ER, the EMI option will need to be exercised after 6 April 2012.  The EMI shares themselves must held for at least one year and so cannot be disposed of until 6 April 2013 at the earliest.

For those employees who are in a position to hold the shares for a period of 12 months rather than disposing of them on or around the time of exercise, such shares will qualify for ER and be subject to CGT at the rate of 10% (rather than the highest rate of CGT of 28%) on the first £10 million of qualifying lifetime gains.

At the present time, these proposals are at consultation stage with more details to follow.  As with all such transactions, advice should also be sought before proceeding.

Steven Mugglestone BA FCA,
Finance Director Services
McGregors Corporate, Entrepreneurial Chartered Accountants and Business Advisers
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Written by Steven Mugglestone

May 30, 2012 at 1:58 pm

Posted in Tax

Tagged with , ,

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