Budget changes: Entrepreneurs' relief and EMI options

Budget changes: Entrepreneurs' relief and EMI options

Published:

Author: Niall Murphy

The Finance Bill 2013 makes changes to the rules applying entrepreneurs' relief (ER) to the disposal by an employee or officer of a company, on or after 6 April 2013, of shares meeting the requirements of the enterprise management incentive (EMI) scheme.

Details

ER enables shareholders of companies to sell their shares at a capital gains tax rate of only 10% for lifetime gains of up to £10m.

This is in contrast to the normal rate of 28% applying to capital gains.

The Finance Bill relaxes the rules relating to ER for shares acquired through EMI options, by disapplying the normal requirement for the seller to hold 5% or more of the shares of the company at the time of disposal.

The change applies for shares acquired through EMI options exercised after 5 April 2012.

The main requirements for ER to be available for shares acquired under EMI options are:

  • the shares are acquired on or after 6 April 2012 as a result of that person exercising a qualifying option over them
  • the qualifying option had been granted at least one year before the date of the share disposal 
  • the individual disposing of the shares must have been an employee or officer of the company (or a company in the same trading group) throughout the year ending with the date of disposal; and the relief is also extended to similar disposals that take place within three years of the company ceasing to be a trading company

This represents a useful relaxation of the rules, since most employees with EMI options do not hold enough shares in the company under the normal rules applying to ER to enjoy the relief.

If a company is considering granting options to its employees the extension of ER gives another reason for granting options under the EMI rules if possible.

This, coupled with the recent increase in the individual EMI limit to £250,000, means that in a lot of cases, EMI options are likely to be the best way for a company to incentivise its staff.