As “trailed” in November's pre-Budget report the Government will be introducing a new Enterprise Management Incentives scheme in the next Finance Bill. These schemes, (EMIs), will encourage key employees to join small higher risk companies by offering access to a tax-advantaged share option scheme. Under the scheme independent trading companies with gross assets not exceeding £15 million will be able to award up to 15 key employees options over shares worth up to £100,000 (at the time of option grant).
In addition, several significant enhancements will be made to EMIs as originally proposed so that when the shares are sold, the gain arising will qualify for the more generous business asset CGT taper relief and, in addition, this relief will start from the date the options are granted. In many cases, the resulting capital gains tax bill will be similar to, and sometimes lower than, the equivalent tax payable in other countries, including the US.
For example: a key employee is granted an EMI option over 100,000 shares when the market value is £1 a share. The employee exercises the option 3 years later when the shares are worth £3 and enjoying a paper gain of £200,000. No income tax or NICs will be payable on this paper gain of £200,000. The employee decides to sell the shares 2 years later when they are worth £500,000. Under the new capital gains tax proposals for EMI and with a proposed 5 year taper, the gain of £400,000 will be reduced to £100,000. In effect the full gain will be chargeable at an effective capital gains tax rate of only 10 per cent, giving a tax bill of £40,000.
EMIs can be offered by both listed and unlisted companies, provided they meet the qualifying conditions.
The options can be given to anyone working for the company for a substantial amount of their time, whether they are an inventor, a scientist or an expert in raising finance.
Red tape will be cut by using a simple notification process rather than the normal approvals system. Companies can be much more flexible than at present in the terms and conditions of the options they grant compared with existing tax-advantaged option schemes.
There will normally be no tax or National Insurance for the employee to pay when the options are exercised; nor will there normally be any National Insurance charge for the employer.
The Inland Revenue estimates that over 2,500 companies will take up EMIs over the first three years at a cost of around £45 million a year to the Exchequer by 2005/2006. The Government intends that legislation will be introduced in Finance Bill 2000 to make EMIs available from the date of Royal Assent to the Bill which is expected to be in July 2000. There will be a review of EMI after 5 years to see if it is fulfilling its purpose and aims.