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Budget 2020: Tax-advantaged share plans post Budget 2020
Caroline Harwood, Partner, Head of Share Plans and Employment Tax
In his Budget speech the chancellor stressed the need for a “thriving private sector” in order to weather the storm of coronavirus (COVID-19). The impact of well-structured share-based incentives on private company performance should not be underestimated and, as such, there has been concern about the future of the most popular tax-advantaged share plan, the Enterprise Management Incentive Plan (EMI).
Under EMI share options granted to qualifying employees of qualifying companies, they are free of income tax and if certain conditions are met the gain on the sale of the shares will automatically qualify for Entrepreneurs’ Relief (ER) and therefore will be subject to Capital Gains Tax at 10% on the remaining element of the shareholder’s lifetime allowance. This represents an extremely attractive tax relief - effectively taxing gains at 10% rather than at income tax rates of up to 45%. Plus both employees’ and employers’ National Insurance Contributions. However, this relief is subject to EU State Aid approval and as such is only currently available during the transitional period up to 31 December 2020.
In recognition of the importance placed on EMI by businesses, the Chancellor has announced that the government will review the EMI scheme to ensure it provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and examine whether more companies should be able to access the scheme.
It is also notable that the ER lifetime allowance has been reduced to £1 million (from £10 million) with effect from 11 March 2020. However, this will have no impact on the majority of EMI option holders whose chargeable gains are typically less than the new £1 million limit.
Larger employers, who do not qualify for EMI and so utilise other forms of the tax-advantaged share plan, will be pleased to note that no changes have been proposed to the well-known SAYE/Sharesave plan, the Share Incentive Plan or the Company Share Option Plan (similar to EMI but subject to lower limits on the value of options available to employees and less restrictive with regards to qualifying employees and businesses).
So the message to business is that if you are planning to grant EMI options in their current form, we recommend that you do so before the end of the transitional period on 31 December 2020.
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Partner, Head of Share Plans and Employment Tax
+44 (0)20 7842 7274
Read Caroline's full CV