In a Budget in which no-one expected fireworks, Chancellor George Osborne did not disappoint.
However, there was good news for companies seeking to enfranchise managers and employees through increasing equity participation. After many years of making it more difficult for companies to transfer capital value to key staff without falling afoul of a UK income tax regime that is markedly more penal than the capital gains tax (CGT) regime, this year’s Budget has built upon the welcome reversal of this policy started in the 2012 Budget.
The last Budget announced two important changes. Firstly, the limit on the value of shares over which options may be held by an employee under an Enterprise Management Incentive (EMI) scheme was increased from £120,000 to £250,000.
Secondly, it announced an extension to Entrepreneurs’ Relief to cover gains made on shares acquired under EMI schemes. This Relief normally reduces the effective rate of CGT from 28% to 10% on the first £10m of an individual’s lifetime gains provided that, in relation to sales of shares, the individual holds at least a 5% stake in the company. The 2012 Budget announced the removal of this minimum shareholding requirement in the case of EMI shares. The Relief has now come into force and applies to gains made on shares acquired under an EMI on or after 6 April 2012 and disposed of on or after 6 April 2013.
The removal of this requirement eliminates a meaningful obstacle to the utility of EMI schemes as a vehicle for spreading equity participation across a wider spectrum of employees tax-effectively.
The Chancellor’s 2012 Autumn Statement announced a new employment status – ‘employee shareholder’ – to further encourage employee share ownership. In exchange for giving up certain employment rights, employees may become owners of a stake in the company they work for by being given shares in the employer company worth between £2,000 and £50,000.
The 2013 Budget confirms that, from September 2013, employee shareholders will be able to receive up to £50,000 of capital gains CGT-free when selling shares acquired under such an employee-shareholder agreement. The first £2,000 of shares received by employee-shareholders will also be free of income tax and national insurance contributions.