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What does the new decade herald for EMI Option Schemes?

The Enterprise Management Initiative (EMI) option scheme is a tax efficient incentive scheme designed to incentivise employees by enjoying the rewards of growth and business success usually on a sale.

Crucially an employee exercising an option under an EMI option scheme can, subject to the rules, expect to qualify from Entrepreneurs Relief on the capital gain realised on the disposal of the option shares.

Entrepreneurs Relief is a form of tax relief which means that currently an individual who qualifies for the same will pay 10% tax on any capital gain as opposed to the standard rate of capital gains tax which for the current 2019/2020 tax year stands at 20% for gains realised on assets other than land or property.

There are a number of rules that need to be followed and failure to do so will result in the relief being lost and a potential challenge by HMRC.  Some of these rules include:

  • The option must sit in a small company defined as has having fewer than 250 employees and less than £30 million in total assets;
  • an employee must be working full time to qualify. This is defined as dedicating at least 25 hours or at least 70% of total working time. The employee must also not hold 30% or more of the total shares in the company; and
  • options must be granted at fair value and there is a requirement to notify HMRC after the date of grant and in any event within 92 days.

Needless to say, the use of EMI option schemes in the SME sector has been popular and welcomed by employee and business owners alike.

Entrepreneurs Relief is a form of tax relief

Many practitioners anticipate changes to Entrepreneurs Relief in the March 2020 budget primarily because of the tightening of its application over the last 18 months generally. Whilst it is unlikely to be scrapped in its entirety, most commentators expect that the allowance maybe reduced significantly and that there will be further tightening on the types of shareholder who may be able to qualify for it. Will this spell the end for EMI?  Unlikely, but it is anticipated that the appetite to set up such schemes where Entrepreneurs Relief is the key driver maybe reduced.

One of the reasons EMI option schemes are lawful is because of approval under the EU State Aid rules which otherwise generally restricts the ability of members providing aid to businesses.

The UK governments sought further approval to EMI option Schemes in 2018 which effectively preserved the tax advantages and structure of them.  Following the 31 January 2020 and the UK’s departure from the EU what impact does this have on EMI option schemes?

What is certain is that during the transition period the refreshed approval sought in 2018 remains. Afterwards will be the subject of a trade agreement between the UK and EU.

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This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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