Welcome News on Enterprise Management Incentives
Enterprise Management Incentive (EMI) share options already provide a tax efficient way to deliver reward to the employees and directors of entrepreneurial businesses. Today’s announcements mean that potentially the tax analysis is further ameliorated.
Today’s Budget contained two pieces of welcome news in relation to Enterprise Management Incentive (EMI) Share Options.
EMI Options already offer a tax efficient way for small and medium sized businesses to reward employees; for options that are awarded at market value, there is no income tax or NIC due on grant or on exercise and instead the employee pays capital gains tax on the gain they make when selling the underlying shares. And of course, there is corporation tax due on the gains made by employees on exercise too.
For several years now, the limit on the value of EMI options that any individual can hold has been fixed at £120k. From 6 April 2012, that limit is set to more than double to £250k, extending the scope of EMI schemes for many employers.
There was also an announcement that, for options exercised on or after the same date, capital gains tax Entrepreneur’s Relief (ER) will be extended so that it can apply on the sale of shares acquired on exercise of EMI options. That would mean a tax rate of just 10% on profits made under an EMI option, compared to the current rate, which will typically be 28%. No details of this have been released as yet, so its not clear what conditions this extension will carry; for example, will there be a minimum option holding period? will the option need to be over 5% or more of the company’s shares? Whatever the conditions, this change could result in some significant tax savings being achieved; up to £1.8million per individual at the extreme end of the scale.
It’s well worth reviewing any existing share incentive arrangements in light of these changes. And for companies considering adopting a share scheme, the new rules further enhance the appeal of EMI options. Our advice would be to act quickly as there is likely to be a qualifying holding period of year before an EMI option attracts ER. And with a 10% tax rate on offer, it would be a shame to miss out …