The changes in the capital gains tax regime that were announced last autumn and confirmed by the Chancellor in the budget have moved the goalposts for those employees who currently hold options over shares under the EMI option arrangement.
The capital gains changes initially proposed by the Chancellor would in many cases have increased the amount of CGT payable on a sale of shares from an effective rate of 10% or less to a rate of 18% but following a good deal of pressure, the Revenue announced that a new “entrepreneurs’ relief” would be introduced to soften the effect on businesses of the abolition of taper relief.
The bad news is that the new CGT relief does not replicate the provision that allows an EMI option holder to exercise his or her options and pay CGT at a rate of 10% where two years have elapsed from the date the options were granted.
The better news is that the 10% rate continues to be available (for gains not exceeding £1m) even where options are exercised immediately before sale but only where the employee has held at least 5% of the company’s shares throughout a period of one year to the date of sale. Small company employers may now wish to consider providing a 5% shareholding to employees as part of their share scheme arrangements. Other EMI measures introduced by the Chancellor include an increase from £100,000 to £120,000 in the value of unexercised options that may be held by each option holder, and the easing of some of the annual reporting requirements.
The reduction of CGT to a flat rate of 18% brings the ‘old style’ approved Executive Share Option Scheme back into favour. This scheme may be attractive to certain employers as they are open to any type of company, whether it carries on a trade or an investment activity and contrasts with the limitations on the company’s business activity prescribed by the EMI scheme. Up to now, CGT of 40% would normally be expected to be payable under this approved scheme. Options may be granted to selected employees and directors but these are subject to the overriding limit that no participant can hold options that have a market value exceeding £30,000.
This article was also published by TaxationWeb.