EMI Options – Business Asset Disposal Relief

by James MacDonald

9 June 2022

Enterprise Management Incentive (EMI) share option schemes are a real consideration for businesses wanting to incentivise retain and reward key members of their team, but do not yet have the cash available to sustain high salaries or offer regular bonuses. Find out how EMIs can offer significant advantages to your star performers.

Business Asset Disposal Relief

Earlier this month we posted a reminder about Business Asset Disposal Relief (BADR) for Capital Gains Tax, what it applies to and how it may be claimed .

The relief is not new – it was known as Entrepreneurs’ Relief for tax years up to 2019/20. The name change did not affect the operation of the relief and to re-state, it can apply to the sale of:

  • The whole or part of a business
  • Former assets of a business when it ceases
  • Shares in a trading company of which the seller is an employee and meets a minimum shareholding requirement
  • Shares acquired through the exercise of an option under the Enterprise Management Incentive scheme – there is no minimum shareholding requirement for these
  • An individual’s interest in a trading partnership.

The relief is not available to companies and there are a number of conditions that must be met in order to qualify. But when it is available, capital gains are charged at 10% in place of the standard CGT rate of 20%.

You can currently claim BADR on a cumulative total of £1 million in capital gains over your lifetime – which means you could qualify for the relief on more than one disposal. Before March 2020, the lifetime limit on gains that could qualify was £10 million. So at first sight it seems that its usefulness has rather diminished. Certainly, for someone selling a valuable business in its entirety, it has!

 

Enterprise Management Incentive

But look again at the categories of assets that would qualify. We are seeing Enterprise Management Incentive (EMI) share option schemes becoming a real consideration for companies who want to incentivise, retain and reward key members of their team, but do not yet have the cash available to sustain high salaries or offer regular bonuses.

Options to acquire shares in the business and participate in its future growth may provide an equivalent incentive to employees to stay for the longer term. Added to which, the advantage of a 10% CGT rate as opposed to combined income tax and NIC rates now approaching 50% on a substantial option profit is self-evident.

Broadly, EMI schemes are available to companies with a permanent establishment in the UK, gross assets not exceeding £30 million, that carry on a commercial trade (some activities are excluded) and have fewer than 250 full-time equivalent employees. The company issuing the options must not be under the control of another company.

 

To find out more about EMI, either as an employer yourself or if you have been issued options in your employer’s scheme, please get in touch with the tax team here, myself or your usual Ecovis contact.

James MacDonald

Senior Manager

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