In my previous blog "How do I set a share option price?", I discussed share options generally and I touched upon the role that tax can play in share options. Enterprise Management Incentives (“EMI”) are tax advantaged share schemes approved by HMRC available to companies and employees who satisfy certain criteria. Provided the employee works for a company for either 25 hours or 75% of his/her working time in a company with gross assets of less than £30m, that employee may qualify for EMI share options in a company provided the value of the share options on the date they are granted does not exceed £250,000. If the conditions for EMI share options are satisfied, there should be no income tax or national insurance due on the grant of the share option. I do not intend to give a full analysis of the EMI scheme in this blog, but more information regarding EMI schemes can be found here
Changes to Bring in the Benefits of Entrepreneurs’ Relief
I see many of our high growth entrepreneurial clients put EMI share schemes in place as a tax efficient way of granting their employees incentives and the chance to share in the potential future value in the business. One important change to the EMI regime which could be of further benefit to EMI share option holders is that they may qualify for Entrepreneurs’ Relief when they eventually sell their shares. Entrepreneurs’ Relief is a lifetime relief on up to £10m of capital gains which can, subject to certain criteria, give an individual an effective capital gains tax rate of 10% on the gain realised instead of the usual 18% or 28% rate. Previously, in relation to the sale of shares, the relief was only available to employees/officers who held at least 5% of the voting shares in a company for a minimum period of 12 months. The requirement for holding shares for 12 months is removed in the case of certain EMI options acquired after 6 April 2013 (or, subject to certain criteria, options acquired after 6 April 2012), as too has the requirement that they hold 5% of the voting shares. Provided the option has been granted at least 12 months before the option holder eventually sells his/her shares, the option holder may be able to get a 10% CGT rate on the disposal of the shares.
It is quite possible to imagine the situation of a company with a number of option holders who hold “exit only” share options. “Exit only” options mean the option holder would only be able to exercise their share options immediately before a company is sold, therefore they wouldn’t actually hold the shares outright for more than 12 months. Under the previous rules, they would be taxed on their gain at the applicable CGT rate (18%/28%), while those who have held shares outright for longer than 12 months may only have to pay 10% CGT. The new rules give a better deal to employees and make EMI share options for high growth entrepreneurial companies a more attractive proposition for giving incentives to staff.
Changes to EMI Notification Requirements
As EMI are tax advantaged options, the grant of any such options needs to be notified to HMRC within 92 days of the date of grant. Previously this was done by paper form, but with effect from 6th April 2014, HMRC have introduced a new scheme requiring that notifications of grant of options must be done online. In a further move away from paper filing, each company with an EMI option scheme must also register that scheme with HMRC and, with effect from 6th April 2015, submit an annual return setting out of the status of EMI options within the Company. Companies should be aware of these changes and, if in doubt, should consult their lawyer or accountant to ensure they comply with the new regime.