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Business Tax  •  Share Schemes

Bring on the 10% tax rate – Budget brings useful relaxation to ER rules

By RJP LLP on 13 April, 2012

Setting up an EMI share scheme can be a very useful tax planning tool. Some important changes were announced to the EMI enterprise management scheme in last month’s Budget. Overall, the net result is a very positive one, as it significantly widens access to EMI options. These have been shown to be a worthwhile and tax efficient method of offering share options to employees. In addition to broadening access to the scheme itself, the individual limits to the amount of shares that can be held have also been increased.

The key changes announced are as follows:

Currently, only £120,000 worth of EMI options can be held by any single individual. This will be increased to £250,000 in the future, although the Chancellor did not yet confirm when. It was also confirmed that additional guidance from the Government, aimed at giving enhanced support to start ups, is to be provided in the near future.

It is also likely that the following changes will be announced in the 2013 Finance Bill. Firstly and very significantly for many of our clients, there will be an improved position for share owners in relation to qualification for entrepreneur’s relief (ER). This is an important form of capital gains tax relief for business owners, since it offers the potential to pay just 10% tax when business assets are sold, provided certain qualifying criteria are met. Contrast this to the usual main rate of 28% and it highlights how valuable these enhancements will be for EMI scheme operators and members.

Under normal circumstances, to qualify for ER requires that shares have been owned for at least 12 months prior to a disposal and that the individual involved owns a minimum 5% holding. Although the exact details have not yet been announced, it is expected that although the 12 month ownership ruling will remain, for shareholders within an EMI scheme, it will not be necessary to have a 5% holding to qualify for the 10% tax rate upon disposal of the business. This is welcome news for EMI scheme members and a powerful additional staff motivator because under the old rules, most employees with EMI options would not hold a large enough stake in the company to be able to benefit from this tax relief.

Another positive development affects entrepreneurs with academic links. In the future, university initiated research initiatives spun out as a business will also qualify for ER. This change will be useful as in most instances, company directors in this position would not be eligible for the 10% rate because they would not satisfy the full time working criteria.

It is also likely that other announcements to improve access to other tax efficient share ownership schemes will also be included in this year’s Finance Bill, although we do not have further detail at this stage.

All in all, now could be an excellent time to consider an EMI scheme if you do not already operate one. It has always been highly tax efficient and is set to become even more so in the near future. Added to this, whilst you may not be able to offer your most valuable staff members pay rises at the moment, shares in a growing business are a powerful motivator and a very good way to retain their loyalty in the long term.

For more information on setting up an EMI share scheme, contact Lesley Stalker by emailing las@rjp.co.uk

 

 

 

 

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