Recent changes to HMRC guidance on EMI options mean optionholders should benefit from Entrepreneurs’ Relief even if they hold less than 5% of the company.
The March 2012 budget extended Entrepreneurs’ Relief (ER) to shares acquired through EMI options. This meant that shareholders who had acquired their shares by exercising EMI options after 5th April 2013 would qualify for ER, even if they didn’t own 5% or more of the company (the normal threshold for ER to apply).
However, in order to qualify, the optionholder would have to have held the shares for 12 months before sale, regardless of how long (s)he had held the options before exercising them. This meant that options only exercisable on or immediately before exit would not benefit.
Broadening the Benefit
HMRC have now amended this, so that ER will apply if the options (rather than the shares) have been held for 12 months or more. This means that options exercisable on exit will now qualify, provided they are exercised after 5th April 2013 and provided the options themselves were granted at least 12 months ago.
It makes it a very tax-efficient incentive: if the option exercise price is equal to the market value of the shares (as agreed with HMRC) when the options are granted, the recipient will not pay any income tax or national insurance on exercise. And when the shares are ultimately sold, the recipient will only pay 10% capital gains tax. This will apply however small their shareholding in the company – the normal 5% ER test will not apply.
Overall, this makes EMI options a more attractive way for owner-managers to incentivise key members of staff.
The key will be to ensure the EMI options are granted at least 12 months before a sale is likely to be completed, in order to make sure they qualify under these new rules.