Retaining the Best


Maung Aye
Mackrell Turner Garrett

As we enter 2013, most businesses are struggling to increase productivity and profitability in a challenging economic climate. As a result, business owners are recognising that incentivising and retaining staff is key to ensuring the success and longevity of their businesses.

EMI (Enterprise Management Incentive) options have traditionally been classed as one of the more favourable tax advantaged share incentive schemes that may be offered to employees. As a result of certain changes to the EMI legislation in the 2012 Budget, EMI options are about to get much more attractive.

One of the benefits of an employee owning shares is the availability of Entrepreneurs’ Relief (ER) when the shares are sold. If an employee is eligible for ER then their capital gains tax rate is reduced from 28% to 10% for the first £10 million of gains. ER is currently only available in the following circumstances:

  1. When shares are disposed of by officers or employees of the company (or a company in the same group) who hold at least 5% of the ordinary share capital and voting rights and these requirements have been met for a period of at least one year prior to the disposal.
  2. If the company is a trading company or a member of the trading group.

The 2012 Budget abolished the 5% shareholding requirement for shares issued on the exercise of EMI options on or after 6 April 2012 which are sold on or after 6 April 2013. ER will therefore be eligible to these option shares irrespective of the option holder’s shareholding in the company. Companies will therefore have the flexibility to grant options over non-voting shares as well as shares with voting rights.

A further significant change was that the one year holding period will be deemed to commence on the date the option is granted, rather than from the date the option is exercised. This again will apply to EMI options exercised on or after 6 April 2012 where the option shares are sold on or after 6 April 2013.

These new rules on EMI options will be a welcome change to holders of “exit only” options, (options exercisable only in the event of a sale of the company) who will be able to benefit from ER provided that they have held the option for the requisite one year period and all other conditions are satisfied.

Companies will be able to use the increased flexibility provided by these changes to retain and incentivise their most valuable employees and to ensure that their businesses are in the best position to tackle the tough economic challenges head on.

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