Further details of the way in which shares resulting from Enterprise Management Incentive ("EMI") options are intended to benefit from entrepreneurs' relief from 2013 have been published by HM Revenue & Customs ("HMRC").  This follows an announcement in last week's Budget (see our earlier Law-Now here).

HMRC has confirmed that the Government intends to relax the current requirement so that employees selling shares acquired on the exercise of EMI options will be able to claim entrepreneurs' relief (and so pay CGT at the reduced rate of 10%) even if they do not have a 5% shareholding.

However, the remaining conditions for entrepreneurs' relief will still need to be satisfied.  In particular, the shares will need to have been held for 12 months following the exercise of the EMI option.  This will severely limit the impact of this proposal as the vast majority of EMI options are in private companies where options only become exercisable on a sale of the company.  Individuals exercising EMI options on an exit will not, therefore, be able to benefit from this change as they will hold their shares for only minutes (if that).  It is unclear at this stage whether entrepreneurs' relief will be available if the individual rolls over into new shares or loan notes on an exit and then sells those after the year long holding requirement and other conditions are then met.

It is likely that a considerable amount of lobbying will now start for the starting point of the one year holding period for EMI shares to be the date of grant of the relevant option, not its exercise (as indeed was the case with taper relief).  This would mean exit only options would be able to benefit on sales so long as the option had been held for a year, which is far more likely to be achieved.


The intended new rules are subject to State aid as well as Parliamentary approval but are intended to apply to shares acquired on the exercise of EMI options on or after 6 April 2012.  Clarifying earlier uncertainty, the earliest date on which shares acquired on the exercise of EMI options can be sold for entrepreneurs' relief will therefore be 6 April 2013.  Draft legislation is expected to be published in Autumn 2012.

Possible action to be taken now

The change is unlikely to affect optionholders whose capital gains should be sheltered by the annual exemption (currently £10,600) or make much difference to those who will pay tax at the 18% rate, but for higher rate taxpayers the difference is notable.

Option holders who can do so (probably only those in quoted companies operating EMI schemes rather than exit only schemes unless those schemes are amended) may wish to consider exercising their options on or after 6 April 2012 to trigger the start of a 12 month holding period.  However, there are a number of issues to consider – including are the options currently exercisable, how will any exercise price and tax (if the options were granted at a discount or a disqualifying event has occurred) be funded and can the shares be forfeited if optionholders leave employment after exercising their options?  It is also possible that the proposals will change before they are enacted or that the shares may fall in value after exercise to below the exercise price.

Other interesting tax planning ideas may also be available.

To read HMRC's announcement, please click here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 30/03/2012.