In this Insight, we consider the measures relevant to employee share plans announced at Budget 2020. We focus on enterprise management incentive (EMI) options and entrepreneurs' relief (which is to remain, with a reduced lifetime limit).
Entrepreneurs' relief to remain, with a reduction in the lifetime limit
There has been much recent speculation in the press that the Chancellor would take the opportunity to reform or even abolish entrepreneurs’ relief (see our recent Insight here).
The headline message from Budget 2020 is that entrepreneurs' relief is to be retained, which will be welcomed by the business community (given recent rumours that it would be abolished in its entirety).
The reform announced by the Chancellor in his speech is that from 11 March 2020, the lifetime limit on gains eligible for entrepreneurs' relief will be reduced from £10 million to £1 million. The reduced limit will apply to qualifying disposals made on or after 11 March 2020.
EMI options continue to be a valuable incentive arrangement
EMI options are discretionary tax-advantaged options, popular as a flexible incentive arrangement. They remain the most tax-efficient incentive plan for qualifying companies and employees, notwithstanding the reduction in the lifetime limit.
The main tax advantages available under EMI are relief from income tax and NICs on exercise of qualifying market value EMI options and the availability of entrepreneurs' relief on the sale of shares acquired on exercise of EMI options.
Special rules apply to EMI options, which mean that disposals of shares acquired under qualifying EMI options may be eligible for entrepreneurs' relief (which offers a reduced 10% rate of capital gains tax), provided certain conditions are met (broadly, the option was granted more than two years before the shares are sold and the option holder remained employed by the company throughout that period).
The new, reduced lifetime limit of £1 million is still set at a generous level for the majority of EMI option holders, who (depending on their personal circumstances) are still likely to be able to claim entrepreneurs' relief.
Indeed, the government's Budget 2020 overview document notes that only around 120 individuals are expected to be impacted by the entrepreneurs' relief change in the context of EMI. For disposals made on or after 11 March 2020, to the extent that an individual's gains exceed the new lifetime limit, they will be liable to CGT at the applicable rate (currently 20%).
Possible expansion of EMI?
The Budget 2020 report indicates that the government will review the EMI scheme to ensure it provides support for high-growth companies to recruit and retain their best talent so they can scale up effectively.
Interestingly, it also notes that the review will examine whether more companies should be able to access the scheme.
Employee share plans more widely
It should be remembered that EMI is only available to qualifying companies and employees. Company share option plans and growth shares remain a possibility for companies and employees which do not qualify for EMI.
The savings-related share option (SAYE) plan and share incentive plan are also available for qualifying companies wishing to provide incentives on an all-employee basis.
Employee Ownership Trusts
Given the reduction in the lifetime limit on gains eligible for entrepreneurs' relief, selling shareholders may in the future look more closely at employee ownership trusts (EOTs) as a way of achieving a tax efficient exit.
An EOT is a specific form of employee benefit trust which is designed to encourage employee ownership of a company. Generous tax reliefs are available for shareholders who sell a controlling stake in their company to an EOT, provided certain requirements are met. Note that shareholders do not need to sell all of their shares and can continue to hold shares in the company (as long as the trustee of the EOT holds a majority stake).
CGT relief is available for disposals of shares to EOTs - structured correctly, there should be no CGT liability for the selling shareholders. An exemption from income tax is also available for certain bonus payments made by a company owned by an EOT to all eligible employees, up to a limit of £3,600 per employee per tax year.
An EOT can provide a tax-beneficial way for shareholders to realise value and to involve employees in the company they work for. The structuring and funding of an EOT require careful consideration – in particular, it is important that the equality and participation requirements are observed in the operation of the EOT.
If you would like to discuss the implications of any changes announced at Budget 2020 on your incentive arrangements or employee share plans more widely, please contact a member of the Osborne Clarke incentives team.