Some interesting enhancements to the regime. HMRC have now published further information concerning the availability of Entrepreneurs’ Relief on shares acquired on the exercise of qualifying EMI Options. The proposed changes are subject to state aid approval with draft legislation planned for Autumn 2012.
The new legislation - which applies to EMI options exercised on or after 6 April 2012 - essentially removes the normal Entrepreneurs’ Relief requirement to hold 5% of a company’s shares for those shareholders who have acquired shares on the exercise of a qualifying EMI Option. All other conditions for Entrepreneurs’ Relief on the sale of shares remain, that is, for a period of twelve months prior to disposal the shareholder needs to hold the shares and be an officer or employee of the company.
Comparison with the old Taper Relief Rules Unlike Business Asset Taper Relief, where the taper relief clock commenced from the date of grant, the period of ownership for Entrepreneurs’ Relief commences only from the date of exercise. The first occasion that Entrepreneurs’ Relief could be claimed on the sale of shares acquired on the exercise of an EMI Option will be 6 April 2013. EMI Options tend to be exercised only when the shares acquired can be immediately sold (for example, on the occasion of a trade sale or to an Employee Benefit Trust).
Its now worth thinking about an early exercise where an exit event is likely. Whilst the new legislation is not as generous as first thought - there's a surprise! - it does provide opportunities for employees or directors who are intending to acquire less than 5% of a company’s shares (or if there is a risk that future funding rounds will dilute shareholders so that they will hold less than 5%). If shareholdings below 5% are acquired as part of a normal subscription, i.e. outside of an EMI Scheme, Entrepreneurs’ Relief would not be available on a future sale. However, if both the company and director / employee satisfy the requirements of the EMI legislation, such shareholdings could be acquired via the grant of an EMI Option that is capable of being exercised immediately. The 5% shareholding rule would then not apply and Entrepreneurs’ Relief would be available after 12 months provided that the other conditions are satisfied.