The draft Finance Bill, which was published yesterday, said that the 12-month 'qualifying period', during which shares must be held in order to qualify for tax-advantaged entrepreneurs' relief, will start to run from the date of the grant of an EMI option rather than at the date an employee exercises that option.
The Government has also confirmed that shares acquired on exercise of EMI options will be able to qualify for entrepreneurs' relief, even if the individual does not meet the current requirement to hold a 5% stake in the company. Where gains made when shares are sold qualify for entrepreneurs' relief the rate of capital gains tax (CGT) that will apply is 10%, rather than the normal 18% and 28% rates. These rates are for the 2012/13 tax year and different rates could be in force in the future.
The removal of the 5% holding requirement was announced by HM Revenue and Customs (HMRC) in a technical note in March, and applies to EMI options exercised on or after 6 April 2012. The change to the way the holding period is measured will apply to eligible shares disposed of on or after 6 April 2013.
Share plans expert Lynette Jacobs of Pinsent Masons, the law firm behind Out-Law.com, welcomed the additional change. EMI share options are often granted on an 'exit only' basis, which are only exercisable when majority shareholders sell their stake in a company. As the shares would usually be sold soon after exercise of the option in these circumstances, it is often difficult for EMI optionholders to settle the 12-month holding requirement.
"Measuring the 12 month holding period for entrepreneurs' relief from the date of grant of an EMI option is a welcome change," she said. "Many companies grant EMI options on an 'exit only' basis, meaning that shares would be sold very shortly after acquisition when the option is exercised. This change means that EMI optionholders will potentially be able to qualify for entrepreneurs' relief and benefit from a lower rate of capital gains tax."
Individuals qualify for entrepreneurs' relief on disposals of shares if they meet certain conditions. The company must be a trading company or the holding company of a trading group, while the individual must be an officer or employee of the company.
EMI options were introduced by the Finance Act 2000. They are intended to help smaller companies with growth potential to recruit and retain the best employees, and offer generous tax advantages to employees of those companies which qualify.
As part of a package of measures to encourage the take-up of EMI options, announced by the Chancellor during the March budget, the maximum value of shares that may be granted to any individual more than doubled, from £120,000 to £250,000. This change took effect from 16 June this year.