Entrepreneurs’ Relief – Why EMI Is Still The Best Option
There was a flurry of excitement in relation to the Budget announcements about changes to entrepreneurs’ relief (“ER”), which impacts on Enterprise Management Incentive (“EMI”) options.
We summarised these in our Budget blog. Some grumpiness arose because up till now, EMI option holders only had to wait a year before the ER treatment kicked in. As of 6 April 2019, they’ll have to wait two years. Is that really that bad? Definitely not. There’s still no need for an EMI option holder to hold shares directly for two years – which means there’s pretty much no risk involved (or at least till they choose to exercise options). And there’s still no need for the shares to meet the “personal company” test – which means that EMI options can be granted over shares with limited rights (e.g. shares without voting rights), and they’ll still benefit from the ER treatment.
That puts EMI option holders in a much better position than a common or garden shareholder, who has to acquire shares directly, and hold them for 2 years, and be certain that the personal company tests are met, before they can be sure of getting ER treatment.
In fact, even then, it mightn’t be guaranteed. Think of the poor shareholder who’s got exactly 5% of the shares in a company now, held for 2 years – but on an exit finds their interest swamped by a collection of happy EMI option holders cashing in. That 5% interest, if diluted by the exercise of EMI options, is unlikely to deliver the hoped-for ER.
In conclusion – despite having to wait a bit longer under EMI, it’s still the most tax efficient and flexible option plan for employees.
If you think an EMI could help you reward and motivate employees, get in touch on 0208 949 5522 or email us at enquiries@rm2.co.uk.