Summary: Improvements to the tax treatment of Enterprise Management Incentive ("EMI") options and the new concept of "employee shareholder agreement," whereby an employee accepts fewer UK statutory employment rights in exchange for shares with tax advantages, will both take effect in 2013.
What's happening to EMI options?
Enterprise Management Incentive ("EMI") options offer
tax-favored and flexible equity incentives for companies which meet
the various qualifying criteria (which include having a permanent
establishment in the UK, satisfied by non-UK companies if they have
either a branch or subsidiary in the UK).
EMI options are intended to help smaller companies with growth
potential, and the major tax advantages of EMI have always been no
UK income tax at grant and no UK income tax at exercise if the
exercise price is set at market value. There is then UK capital
gains tax (normally charged at 28%) when the employee disposes of
his shares where the sale proceeds exceed the market value at the
date of the grant.
New rules, however, allow gains on shares which are acquired on
exercise of EMI options to qualify for UK Entrepreneurs' Relief
(the special 10% rate of capital gains tax) without having to
satisfy the normal 5% holding in the company requirement. In
addition, the one-year ownership requirement for Entrepreneurs'
Relief will be taken from the date of grant of the EMI
option, rather than the date of acquiring the shares on
exercise.
This, coupled with the recent increase in the individual EMI limit
to GBP250,000, means that in a lot of cases, EMI options are likely
to be the best way for a company with gross worldwide assets of
less than GBP30 million to incentivise its staff.
What is a UK "employee shareholder agreement"?
Expected from 1 September 2013, an "employee shareholder agreement" involves an employer and UK employee entering into an "employee-light" contract, where the employee accepts fewer statutory employment rights in exchange for shares of any class with value of at least GBP2,000. The employee would be left with:
- no right to request training or education or to claim flexible working;
- no right to claim unfair dismissal (except in cases of automatic unfair dismissal, such as on grounds of race or gender); and
- no right to a redundancy payment.
Tax rules will be introduced so that the first GBP2,000 of
shares awarded as part of such an agreement will not be subject to
UK income tax. Subsequent growth on these shares (and growth on up
to a further GBP48,000 of shares acquired as part of the agreement)
will be exempt from UK capital gains tax. In return, employers will
have to provide a written statement making clear which employment
rights would be given up and the individual must receive
independent legal advice paid for by the employer.
This has the potential to be a valuable addition to a company's incentive arrangements and could provide extra flexibility in terms of future recruitment. From the employee's perspective, the loss of statutory employment rights might well be outweighed, particularly for those working for fast-growth, entrepreneurial companies, where the potential for upside is strongest.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.