EMI schemes lost some of their appeal with the introduction of Entrepreneurs’ Relief. This is because most EMI option holders would fail the 5% shareholding requirement. This meant that gains on a disposal of shares acquired through the exercise of options would be taxable at 28%.
The rules have now changed so that as long as there is at least a year between grant of the option and disposal the gain would be taxable at 10%. This is therefore an excellent HMRC approved way of incentivising staff.
1. Widget Ltd is valued at £10M.
2. The shareholders decide to grant options over 5% of the company to key members of staff.
3. Although 5% of the company is worth £500,000 pro rata, HMRC will typically agree a value of £100,000 because the options relate to small minority holdings.
4. 2 years later company is sold for £15M.
5. Shareholders enjoy a windfall of £650,000 (5% of £15M less exercise value of £100,000).
6. This gain will be taxed at only 10%!
7. Additionally the company will enjoy a tax deduction of £650,000.
There are qualifying criteria for EMI options to apply but most owner managed businesses should qualify.
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