Are you in the process of granting EMI share options to your employees or setting up an EMI share option scheme? If so, it might be worthwhile to consider postponing any options until the government clarifies its position on tax relief.
What are EMI share option schemes?
Enterprise Management Incentives (EMI’s) are probably the most tax efficient way of granting share options to employees for owner managed businesses; primarily to remunerate, reward or retain employees.
So what has changed and why?
HMRC has announced in the Employment Related Securities Bulletin No 27 (April 2018) that any new EMI share options granted from 7 April 2018 will no longer be eligible for tax advantages arising to employees who will be granted the EMI share options. New EMI share schemes being set up may be treated as non-tax advantaged share option schemes. This has arisen due to the delay by the European Commission giving the UK government EU State Aid Approval for the EMI scheme which expired on 6 April 2018.
What tax benefits are no longer available?
Unless a Statutory Instrument backdating EMI tax advantages is issued in the near future, New EMI share options granted will not benefit from the EMI tax advantages. What this means is that:
- There will now be an income tax charge arising when an employee exercises the option, this will be based on the market value at the date of exercise, regardless of whether or not the exercise price is the same as the approved market value at the date the options were granted.
- Where there is a ready market for the shares (i.e. where there are existing arrangements or intentions for sale), Class 1 NIC charges will also be payable by both the employer and the employee.
- Shares acquired via the new EMI share options will no longer qualify for Entrepreneur’s relief (‘ER’) meaning that the gains will now be charged at 20% instead of 10%. ER generally applies to shares acquired via the EMI share option scheme even when you own less than 5% of the voting rights.
Will current EMI schemes and EMI share option holders be affected?
No, share option schemes set up and share options granted prior to 7 April 2018 still qualify for all tax advantages as normal. However, any new options to acquire shares, even in an existing EMI scheme, temporarily do not qualify for tax advantages. There will still be no tax implications on grant of the options, but when they come to be exercised, they will not benefit from the reliefs.
So what’s next?
There is an expectation that the EU State Aid Approval will be granted in the near future, regardless of Brexit negotiations. HMRC advises that if you are in the process of registering a new EMI share option scheme, hold off until such a time as when the approval has been granted. The same applies to those granting new share option schemes.
I have a contractual obligation to issue EMI share option schemes, what should I do?
Get in touch with us; we would like to understand your particular situation before we can advise as to the best course of action. Feel free to get in touch with Martyn Page or Johan Neethling or call on 01603 227600.