2012 Budget: EMI options: increase in individual limit and extension of entrepreneurs' relief to EMIs

Practical Law UK Legal Update 5-518-5741 (Approx. 5 pages)

2012 Budget: EMI options: increase in individual limit and extension of entrepreneurs' relief to EMIs

by PLC Share Schemes & Incentives

2012 Budget announcements on EMIs

The 2012 Budget contained several announcements about enterprise management incentives (EMI) options.

The most important change is likely to be the proposed extension of entrepreneurs' relief (ER) to shares acquired under EMI options, but this change will only apply, subject to state aid approval, for options exercised on or after 6 April 2012. If EMI option holders are able to postpone the exercise of existing EMI options until after that date, they may be able to qualify for ER when they sell the EMI shares. For more information, see Extension of entrepreneurs' relief.

For more general information on EMIs, see Practice note, EMI share option plans: overview.

Increase in individual limit

Paragraph 1.10 of HMRC's 2012 Budget Overview of Tax Legislation and Rates (Overview) confirms that the individual limit on the grant of EMI options will be increased from £120,000 to £250,000 as soon as possible by secondary legislation, subject to state aid approval. The rule which prevents the grant to an employee of further EMI options for three years after he or she received a grant of EMI options over shares with a value of (currently) £120,000, will remain in place. For more information about the individual limit and the three year rule, see Practice note, EMI option plans: overview.

Extension of entrepreneurs' relief

Paragraph 2.8 of the Overview confirms that the government intends to extend ER to shares acquired on the exercise of EMI options. Since the withdrawal of capital gains tax (CGT) taper relief, EMI option shares have been subject to normal CGT rules and rates. It is proposed that shares acquired on the exercise of EMI options on or after 6 April 2012 will fall within the ER rules. The change will be included in Finance Bill 2013, subject to state aid approval.

We do not have any further details of how the relief will operate, although we understand that:

HMRC intends to waive the 5% shareholding requirement in relation to EMI shares (HMRC has subsequently confirmed that the 5% shareholding requirement will be removed for EMI shares - see Legal update, EMI options: proposed extension of entrepreneurss relief clarified by HMRC).
The one-year holding period for ER will apply from the date of exercise of EMI options.

For more information on entrepreneurs' relief, see Practice note, Entrepreneurs' relief: overview.

Practical point: if possible, exercise on or after 6 April 2012

Companies with EMI options which are due for exercise in the next few weeks should consider whether it is possible to delay the exercise of the options until 6 April 2012, so that option holders may possibly be able to benefit from ER (we understand this will only be the case if they are able to retain their shares for a further 12 months after exercise - see Practical point: if possible, retain EMI shares for one year after exercise).

Practical point: if possible, retain EMI shares for one year after exercise

Because it seems that the period of ownership for ER purposes will run from the date of exercise of EMI options, option holders will have to exercise EMI options on or after 6 April 2012, and then retain the EMI option shares for one year before selling them, in order to qualify for ER. (In practice, EMI options are often drafted to allow option holders to exercise only on an exit, and the shares acquired are immediately sold to the buyer.)

This relief is therefore not as generous as taper relief was in the past (the period of ownership of EMI shares for taper relief purposes was calculated from the date of grant of the EMI option). It is likely that practitioners, companies and stakeholders will lobby for the ownership requirement for ER to apply from the date of grant of EMI options, rather than the date of exercise. If this cannot be secured, it is likely that thought will be given to ways of structuring transactions so that EMI option holders are nevertheless able to secure ER on the disposal of their shares.

Help for start-up companies using EMI

Paragraph 1.10 of the Overview confirms that HMRC intends to improve and develop its EMI guidance and resources, to help start-up companies wishing to use EMI. The new resources are expected to be available by the end of 2012.

Consultation on extending EMI to academics employed by companies

Paragraph 2.8 of the Overview notes that the government will consult on ways to extend access to EMI for academics who are employed by a qualifying company. There are no further details at present, but this could refer to relaxing the working time requirements (see Practice note, EMI share option plans: overview). We expect that draft legislation for this proposal may be published for consultation in autumn 2012.

Sources

HMRC, 2012 Budget: Overview of Tax Legislation and Rates, 21 March 2012, HM Treasury, 2012 Budget Report and HMRC, Tax information and impact note, Enterprise management incentives.

Other 2012 Budget developments

For more on other tax developments relevant to share schemes in the 2012 Budget, see 2012 Budget: tax developments relevant to share schemes.

For PLC's comprehensive analysis of the key business tax announcements in the 2012 Budget, which includes links to other relevant materials, see 2012 Budget: key business tax announcements.

2012 Budget: EMI options: increase in individual limit and extension of entrepreneurs' relief to EMIs | Practical Law