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11th December 2013
Posted in Articles, Business Tax, Employee Incentive Arrangements, Employment Tax, Featured Articles by Forbes Dawson
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.
Example
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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