Tax Video Update - Enterprise Management Incentive Scheme changes
01 July 2013 •
Warrener Stewart Tax Update
Enterprise Management Incentive scheme, July 2013
What is the change?
The draft Finance Bill 2013 includes the provision to allow the period from the date the share options are granted under an Enterprise Management Incentive (“EMI”) scheme to count towards the 1 year period needed to qualify for Entrepreneur’s Relief.
What is an EMI scheme?
EMI is an HMRC approved share incentive scheme to reward and retain key staff by offering them options to purchase shares in the employing company. The idea behind EMI is that the option price (the amount payable for the shares) is set at the open market value of those shares at the date the options are granted; as the key employees increase the value of the company over time they can then exercise the options and acquire the shares (at the price set when granting the options) without any tax consequences.
Why is the change important?
Entrepreneur’s Relief allows a 10% capital gains tax rate to be used (subject to satisfying certain criteria) on the sale of shares. Two of the key criteria surrounding the sale of shares owned by employees are that the employee needed to own at least 5% of the shares in a company and they needed to have owned those shares for at least 1 year.
HMRC had previously announced the removal of the need for the shareholding to exceed 5% of the employing company where those shares were acquired under an EMI scheme but until now the 1 year ownership period only counted from the date the shares were actually issued to the employee (i.e. the period from date of grant of the options did not previously count).
Most EMI share options include a provision to allow unexercised options to be exercised immediately prior to a possible sale/takeover of the company to allow the employees to sell the newly acquired shares. Without the recent change the employee would have faced a capital gains tax rate of up to 28%, however, after the change mentioned above as long as the options had been granted one year prior to the sale the employee should face a capital gains tax rate of 10%.
Conclusion
The change to allow the period from date of grant of the options to count toward the 1 year period for Entrepreneur’s Relief has brought back the EMI scheme into sharp focus as an extremely tax efficient way to reward key members of staff and, more importantly, to retain those key members.
We would be more than happy to explore with you the mechanics of setting up an EMI scheme and the potential tax savings both for the employees and the employing company.