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.
Commencement
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.
