Enterprise Management Incentives
The measure
Changes will be made to the rules for Enterprise Management Incentives (EMI) so that the scheme is compliant with EU state aid rules.
EMI is a tax efficient share option scheme. Gains realised on exercise of EMI options fall within the capital gains tax regime, rather than the (less favourable) income tax regime. The maximum value of tax advantaged options that can be granted to any one employee is £120,000 (based on the market value of the shares at the time of grant).
Historically, to grant EMI options a company would need to operate 'wholly or mainly' in the UK or, in the case of a group plan, at least one company in the group would need to operate 'wholly or mainly' in the UK.
The legislation will be amended so that EMI options can now be granted if the company granting options has a 'permanent establishment' in the UK - ie, the requirement to operate 'wholly or mainly' in the UK will be removed. Alternatively, at least one company in the group carrying on a 'qualifying trade' must have a permanent establishment in the UK.
Who will be affected?
Companies with UK employees who previously did not qualify to grant EMI options may now be able to do so.
When?
The changes will apply to options granted on or after the day the legislation receives Royal Assent (after the summer recess).
This change was announced previously, including in the Budget in March 2010, and is welcome.
Notwithstanding the higher rate of capital gains tax that will apply to higher earners, EMI options are still significantly more tax efficient than realising a gain that is liable to income tax, such as on the exercise of an unapproved share option.
Moreover, if an EMI option holder would qualify for 'Entrepreneurs' Relief' on disposal of the shares, EMI options could become even more attractive - with gains of up to £5m being charged to tax at a rate of 10% rather than 50%.
