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Enterprise Management Incentive Schemes

Whilst the implementation of an Enterprise Management Incentive share scheme (EMI) for the benefit of key employees has always been tax efficient, the rules around EMI are to be amended to make them more attractive.

In order for employees who have acquired shares through an EMI scheme to benefit from entrepreneurs relief (ER) and a 10% capital gains tax rate they have needed to meet the specific conditions for ER. In other words, the employee must have owned 5% of the shares of the company for at least twelve months prior to a sale of those shares.

In the Budget 2012 it was announced that where shares were acquired under an EMI scheme, the 5% requirement would be abolished for disposals of those shares on or after 6 April 2013 (subject to transitional rules). Whilst this was a welcome development, the problem remained that the twelve month holding period still needed to be met.

As EMI schemes are often 'exit based', so that employees can only acquire shares in the event of the sale of a company, the removal of the 5% de minimis is of little practical benefit. In other words as the acquisition and disposal of shares often occur simultaneously ER would still be denied as the twelve month ownership period is not be satisfied.
 
HMRC announced in December that the twelve month holding period will now begin when the option is granted and not when the option is exercised and the shares are acquired.

We believe this will be a huge boost to the scheme. This means that employees can be granted an EMI option today, hold that option for twelve months, then exercise the option and sell the shares immediately and still benefit from a 10% rate of capital gains tax.
 
Enterprise Management Incentive schemes are now arguably the most tax effective arrangements for rewarding key UK employees and should seriously be considered as a tool to attract, retain and incentivise senior staff.

If you would like to discuss implementing an EMI scheme or any of the above in more detail, I can be contacted on 01952 211046 or email richard.murrall@lblaw.co.uk.