What is EMI?
The Enterprise Management Incentive (EMI) is a tax-advantaged share option scheme designed for smaller companies.
It not only helps to retain key staff, but also provides tax benefits for both the employer and employee – please see our article for full details here.
One of the key tax advantages is that no tax is payable upon the grant or exercise of the share option, and any increase in value is taxed as a capital gain rather than income upon sale of the shares. The gain is therefore subject to 20% tax, or 10% tax if the individual qualifies for entrepreneurs’ relief.
It is important to note that the rules for qualifying for entrepreneurs’ relief are more relaxed when it comes to EMI options. This is because there is no minimum shareholding requirement in order for shares acquired under an EMI option scheme to qualify for Entrepreneurs’ Relief (generally this needs to be at least a 5% shareholding).
What has changed with EMI?
As mentioned in our recent blog about entrepreneurs’ relief here, for disposals made before 6 April 2019, in order to qualify for entrepreneurs’ relief, shares had to have been held for at least 12 months prior to disposal.
This holding period has now changed from 12 months to 24 months for disposals made after 6 April 2019.
This extended holding period also applies to EMI shares, such that the 12-month period for which conditions must be met for entrepreneurs’ relief has been extended and now must apply for two years.
Please note, however, that the new two year minimum holding period requirement for EMI options will include the period the option is held. This means that if the option is held for two years this condition is met.
In addition, the other new requirements announced in the UK budget with regards to additional tests of ownership will not apply to EMI options.
This means that an individual who has acquired shares through an EMI scheme will qualify for entrepreneurs’ relief on a subsequent disposal, provided that the option was granted at least two years before the disposal of the shares and the individual has been an officer or employee throughout that two-year period. This is regardless of the individual’s entitlement to the distributable assets of the company throughout that period or any other such tests.
HMRC have tightened the rules on entrepreneurs’ relief, but it is clear that they are keen to ensure that EMI continues to be a very attractive and tax efficient way of incentivising employees.
