George Osborne’s latest scheme to create employee shareholders (where they give up employment rights for shares) isn’t exactly attracting positive reviews. However, there is a much older scheme for employees to acquire a stake in their employing company, which has received a boost in the Autumn Statement.
The Enterprise Management Incentive Scheme (EMI) was introduced back in 2000, and allows qualifying companies to grant tax advantaged share options (a right to buy shares in the future at a price fixed today) to employees. There is no income tax or NIC when EMI options are granted, and, more importantly, none on exercise (the acquisition of the shares) provided that the exercise price is no lower than the market value of the shares at grant. The company should also be entitled to corporation tax relief on the amount of any gains made by the employee on exercise.
Unapproved options would be subject to income tax, and potentially NIC at the time of exercise.
When shares acquired under EMI are sold, Capital Gains Tax will be due on the gain. In recent years, this CGT has normally been at 28%, as such shareholders rarely satisfied the conditions for Entrepreneur’s Relief (ER), which reduces CGT to just 10%.
However, the Autumn Statement confirms that for shares acquired under EMI, the conditions for obtaining ER will be relaxed. It will not be necessary for the individual to own at least 5% of the company’s shares for one year before sale. Instead, there will be no percentage requirement, and the one year qualifying period will run from the grant of the options instead of from exercise. This extends ER to shares sold immediately after exercise; a common scenario. The changes apply to shares acquired from 6 April 2012, and sold from 6 April 2013.
This is great news, as it potentially reduces the CGT bill on such shares from 28% to 10% (as it was until 2008 under the old taper relief regime); so EMI is truly “back to its best”.
EMI options are flexible, with few restrictions on the type of shares which can be used. Each employee can be granted options over shares worth up to £120,000, and the scheme can be restricted to key personnel if desired. However, the employer and employee must satisfy various conditions.
Your scheme must be designed carefully to ensure that it meets your commercial objectives. Now may be the time to revisit this form of employee share ownership.