August 1, 2013

New EMI option law: time to thank the taxman

Here at Horizon, we’ve been advocates of Enterprise Management Incentives (EMIs) for a long time.

Designed to help smaller companies and start-ups grow and recruit top-quality talent by offering tax-free share options, EMIs are an ideal way to reward and motivate staff. They also come with handy tax benefits for your company.

So far, so good. And the great news is that EMIs just got even better.

The 2013 Finance Act recently became law, and it contains changes to EMIs that affect tax rates and timings. Here’s why it really is time for you to thank HMRC.


EMI tax changes

The first – and biggest – reason to celebrate relates to the percentage of shares staff need to hold to qualify for tax benefits.
Previously, employees needed to hold at least 5% of shares to qualify for ‘Entrepreneurs’ Relief’, which enables people to sell shares at a tax rate of just 10%.

That’s now changed. The new legislation means that even employees who hold just 1% of shares now qualify for Entrepreneurs’ Relief – and that can mean a lot more money in your employees’ pockets.

Here’s an example:

    • Let’s say your CTO was awarded options on 1,000 shares five years ago, which worked out as 1% of the company. Back then the option price you agreed with HMRC was £1/share.
    • Now, it’s been a good five years and you’re gearing up for a sale to Google. The share priced you’ve agreed with them is £500/share. (Like we said, it’s been a good five years.)
    • Your CTO decides to sell his 1,000 shares at £500 per share, banking him £500,000.
    • Because share income is treated as ‘capital disposal’ rather than income from your company, your CTO doesn’t need to pay income tax or NI.
    • Previously, however, your CTO would have had to pay 28% capital gains tax on that £500,000.
    • Under the new rules, Entrepreneurs’ Relief means your CTO is taxed at just 10%. That’s a saving of 18% – or a very healthy £90,000 in this example.


EMI timings changes


The second piece of good news might not be quite so profitable, but it’s still a positive result for your staff.
Before the law changes, EMI options exercised within 40 days of a ‘disqualifying event’ (which typically means a member of staff leaving your business) still qualified for favourable tax treatment.

That 40-day period has now been extended to 90 days, giving employees longer to decide what action to take before future gains stop being treated so beneficially.

This change is a lot more subtle, but as many schemes have been set up with the 40-day exercise period, it’s still worth examining yours to see if it can be changed to benefit your team.

All in all then, two reasons to be cheerful – and two reasons to doff your cap to the taxman. And it’s not every day we say that…

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