Gabelle Tax Analysis: Relaxation of Entrepreneurs’ Relief rules

New changes announced in the Finance Bill (published on Tuesday 11 December) mean that individuals may qualify for Entrepreneurs’ Relief (ER) in relation to company shares granted as part of an EMI share plan even if they have not held the shares for 12 months.

Ordinarily, in order for shares to qualify for ER, an individual must, inter alia, hold 5% of the ordinary share capital and voting rights in the company for at least a 12 month period.

The 2012 budget had previously announced that the 5% holding requirement for ER purposes would be removed for shares acquired under an EMI share plan in respect of shares disposed of on or after 6 April 2013. However, most EMI option holders would have been unable to take advantage of this relaxation because EMI options are typically exercised immediatley before an exit and therefore the actual shares are not held for the required 12 month period.

The Finance Bill has rectified this problem by stating that ER will now be available where:

  • The shares were acquired on or after 6 April 2012 on the exercise of an EMI option, and
  • The EMI option had been granted at least one year before the disposal of the shares, or
  • The EMI option was granted at least one year before cessation of the trade followed by a disposal of the shares within three years.

EMI is a tax efficient share plan introduced specifically to help businesses attract and retain key people and to reward those employees for investing their energies and skills to help grow the business. These new changes will make EMI options even more attractive as they allow employees and office holders to receive value from a company on exit and only be subject to tax at a modest 10% rate.

The key features of an EMI are:

  • They must be offered by independent trading companies employing no more than 250 employees with gross assets not exceeding £30m.
  • Options can be granted over shares with a total value of up to £3m.
  • There is an individual limit at grant of £250,000 per employee.
  • Eligible employees are those who work at least 25 hours a week or if less at least 75% of the employee’s working time.
  • No prior agreement is needed from HMRC before options are granted but once granted must be notified within 92 days.
  • Individual EMI agreements can be written including specific performance criteria.
  • The company must carry on a qualifying trade conducted on a commercial basis with a view to profit not consisting of excluded activities outlined in para 16 Sch 5 ITEPA 2003. Where there is doubt over the activity, advance assurance can be requested from HMRC.
  • The value of the shares can be agreed with HMRC before grant.
  • No income tax or national insurance charges arise at the date of grant.
  • If the exercise price is equal to the market value at the date of grant, there is no tax or national insurance charge on exercise.
  • The company will be entitled to a corporation tax deduction based on the value of the shares at exercise less the amount the employee paid for the shares.

Martin Mann is a Director at Gabelle LLP. He can be contacted at martin.mann@gabelletax.com or via TaxDesk on 0845 4900 509.