In the Budget, George Osborne announced plans to improve the Enterprise Management Incentive (EMI) scheme.
Currently, the scheme allows businesses with fewer than 250 employees to reward key members of staff by giving them share options, the proceeds of which, when exercised, are taxable as capital gains at 28 per cent, rather than at the current rate of income tax.
The Government said that it intended to extend Entrepreneur’s Relief to EMI share options from April 6 2012. However, it was not made clear at the time how the favourable effective tax rate of 10 per cent would be applied to the schemes.
Katherine Bullock, a Leeds-based private client tax partner at PricewaterhouseCoopers, believes entrepreneurs should study further details of the scheme, which were announced last week.
In general, Entrepreneur’s Relief only applies to shareholders who have more than five per cent of a company, but under the new rules anyone who has acquired shares through an EMI scheme will qualify, even if their shareholding is less than five per cent.
To benefit from the beneficial tax rate, shares will still need to be held for 12 months before sale.
Ms Bullock said yesterday: “The take up of EMI schemes has been very good since their introduction in 2000, when the Government saw an opportunity to help entrepreneurial businesses to compete for talent with the bigger corporates.
“The introduction of Entrepreneur’s Relief is a welcome addition to EMI, although companies will need to think carefully about how they design their schemes if they want to allow option holders to benefit from these new rules.
“Traditionally, many EMI schemes have allowed options to be exercised only on the sale of a company, so option holders acquire and sell their shares in a short space of time.
“Business owners will need to carefully weigh up the pros and cons of allowing them to exercise their options at an earlier date so shares can be held for more than 12 months before sale.
“More than ever, care in the design phase will be important to ensure business owners balance tax efficiency with their commercial objectives.
“Another important announcement in the Budget was about plans to more than double the current limit that applies to share rights granted to individual employees as part of an EMI scheme from £120,000 to £250,000. This increase is expected to take effect some time later this year.”