Relaxation of entrepreneurs’ relief rules for EMI shares

The Government announced in the Budget that from 2013 gains made on shares acquired through the exercise of EMI options exercised on or after 6 April 2012 will (subject to state aid approval) be eligible for CGT entrepreneurs’ relief. On 29 March 2012, HMRC provided further details and confirmed that individuals disposing of shares acquired through an EMI scheme will now be able to obtain entrepreneurs’ relief where they have less than a 5% stake in the company.

EMI share option schemes have always been attractive to small and medium sized businesses as a means of enabling key employees to acquire shares without incurring an income tax charge.   Shares acquired under such options could always previously qualify for entrepreneurs’ relief; however, frequently, the relief was not available because the employee did not hold at least 5% of the ordinary share capital or voting rights.  

Individuals will still need to hold the shares for at least one year and this is disappointing as many EMI options are not exercised until shortly before there is an exit event.  It is difficult to understand why the Government has relaxed the rules in relation to having a 5% holding but not in relation to the minimum holding period.

Where companies have granted EMI options and anticipate an exit after 6 April 2013, their employees should consider exercising their options on or after 6 April 2012. It is important that the options are not exercised before this date if they do not hold a 5% stake in the company. Where individuals are unable to personally fund the exercise of their options, the company may be able to provide a tax free loan for this purpose.

This change is likely to increase the use of EMI schemes – simply as a strategy for ensuring that holdings of less than 5% qualify for entrepreneurs’ relief.

For further information and help with entrepreneurs’ relief and EMI options please contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.