STOP PRESS!! Employees can get 10% tax rate without holding shares before exit

Posted by admin at 15:51 on 13 Feb 2017


Entrepreneurs' Relief (ER) and Enterprise Management Incentive (EMI) are better than anyone expected - Option holding period now counts towards holding period for 10% tax rate!

Christmas presents came early with the draft Finance Bill 2013, published on 11th December, with fabulous news for both employees and companies with EMI share option plans.

The March Budget teased with the prospect that employees selling shares acquired under an EMI plan would get ER on gains subject to conditions to be announced. We had previously speculated about the forthcoming changes and how the normal eligibility requirements for ER entitlement might be relaxed for EMI option holders.

For the employee, the enhanced ER means they can qualify for the 10% tax rate on the first £10 million of gains when disposing of shares acquired under EMI, if the EMI option has been held for at least a year.

For the employer, it means under an EMI option at least 90% of the gain can be delivered as a reward to the employees, there is a saving of the 13.8% national insurance contributions and the company usually claims 100% of the gain on exercising an option as a corporation tax deduction.

This now means that, for example, where an EMI option over any amount of shares of any class (including non-voting) was granted on 5th April 2012 and is exercised on 6th April 2013 and the shares are then sold on 6th April 2013 the individual would be eligible for ER even though the EMI option exercise and the share sale takes place on the same day.

The new rules will generally come into effect from this tax year but there are transitional rules for existing options so please contact us to check if they apply fully to any EMI exercises or sales planned this year. Furthermore, in certain situations employees can even elect for the beneficial treatment to apply retrospectively to options exercised during this current tax year (2012/13) if they would otherwise have qualified.

Previously, for an individual employee to qualify for ER, the normal ER tests applied, i.e. for at least the year ending on the date of sale the individual must be an officer or employee of the company and hold shares entitling the individual to at least 5% of the voting rights. The company must also be a trading company or the holding company of a trading group.

Now we have a very significant and exciting relaxation of the rules: whilst the EMI option must have been granted at least 12 months before the shares are sold and the individual must have been an employee or officer of the company issuing the shares (or a subsidiary) for at least the year ending on the date of sale there is no longer a requirement for the shares themselves (rather than the option) to be held for a year. The period the share option is held will now count towards the one year holding period requirement for ER. There is also no need for the individual to hold any specified percentage (i.e. shareholdings of less than 5% will be eligible if the shares were acquired under EMI).

This recognises the practical reality that in many cases an employee only wants (or can only afford) to commit to pay a share option exercise price when sale proceeds are available, i.e. at an exit.

The new rules will apply automatically to EMI options exercised and shares sold after 5th April 2013. However, there is even more good news as the provisions have been extended to cover EMI shares sold after 5th April 2013 where the relevant EMI options were exercised after 5th April 2012, provided the new rules would have applied if they had been in place in the last tax year.

Do note that where shares were acquired both under an EMI and otherwise, there are new rules to work out which shares are to be regarded as being sold before other shares to get the ER.

We very much welcome these changes which will further encourage employee share ownership particularly in entrepreneurial companies. The relaxation of the ER eligibility criteria will allow many more employees to benefit from the growth in share value and have any gains taxed at just 10%.

For further details please contact any member of the RM2 team on 020 8949 5522.