EMI and ER

Yes, more acronyms. EMI stands for Enterprise Management Incentives. We’ve spoken about it before. It enables employees to exercise options in their employer’s company at a fixed agreed price and possibly “make a killing” if the share value is enhanced at a later date upon sale or flotation. The maximum value of options which an employee could hold was £120,000. That’s going up to £250,000.

Now here’s more good news. Everybody’s heard of ER – Entrepreneurs’ Relief. A higher rate taxpayer pays Capital Gains Tax (sorry, CGT, let’s stick to acronyms) at a rate of 28%. Not if you get ER. Then, it’s 10%. To qualify for ER on the sale of a trading company’s shares, in the year leading up to sale you need to have owned 5% of the ordinary voting shares and to have been an employee or officer of the company. Now, quite often, an EMI shareholder might not have as much as 5% especially if there are a few such EMI employees. The good news is that gains made on shares acquired through exercising EMI options on or after 6 April 2012 will be eligible for ER. Together with the increased limit of £250,000 it will certainly make EMI’s more appealing.

There is one small drawback. Employees aren’t necessarily flush with funds. Typically an EMI person would wait until the happy day of sale or flotation, exercise his EMI option at the fixed price and immediately sell at the enhanced value. That doesn’t work if you still have to hold your shares (5% or not) and be an employee for 12 months leading to disposal.

We fear this particular bit of generosity may be of limited value.