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Employee Share Plans: Enterprise Management Incentive “EMI” options

The use of the Enterprise Management Incentive ‘EMI’ scheme can help small growing companies acquire and retain employees.  The scheme is available to most trading companies and as well as allowing employers to grant share options to key employee's tax efficiently, can be used as a reward for their efforts within the business and to incentivise key staff.

In last Autumn’s Budget, the Chancellor of the Exchequer made two main changes to Entrepreneurs’ Relief which could significantly affect an employee’s capital gains tax status.

Background

An EMI option provides the employee with an opportunity to acquire shares in the company free of Income Tax and NICs on the difference between the amount paid for the shares when an option is used, and the actual value of the shares.  Until the EMI options are exercised, the employee is not a shareholder in the company.  In the majority of cases, the EMI options are not allowed to be exercised until the company is being sold and this would mean that the employee would not meet the requirements for Entrepreneurs’ Relief. 

From April 2013, however, provided that the EMI options were granted at least one year before any potential sale, then the employees will be entitled to Entrepreneurs’ Relief and only pay 10% capital gains tax on any profit.

New rules

From 6 April 2019 onwards, the one year holding period from the date of grant will be extended to two years.  This applies to all existing EMI options and not just new ones granted following the Budget last week. 

If the two year holding period is not met, this will result in employees paying 20% capital gains tax,  i.e. double the tax originally anticipated.  Consideration needs to be given to the timing of any potential sales or how the additional tax charge can be mitigated.

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Strength in Numbers

January 2019

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