The Chancellor has announced a number of changes in respect of the right to claim Entrepreneurs’ Relief (ER) in yesterday’s Budget. For disposals on or after 6 April 2019, the minimum period throughout which the qualifying conditions for ER must be met will be extended from 12 months to 24 months. Furthermore, in addition to the current requirements on holding at least 5% of the share capital and voting rights, from 29 October 2018 shareholders must also be entitled to at least 5% of the distributable profits on a distribution and at least 5% of the net assets of a company on a winding-up to qualify for ER. Further details of these announcements can be found here.
The Finance Act 2013 extended ER to shares acquired through the exercise of enterprise management incentive (EMI) options (i.e. “relevant EMI shares”). This change means that shareholders who acquire their shares by exercising EMI options qualify for ER even if they do not hold at least 5% of the share capital and voting rights of a company, provided the underlying option was granted 12 months or more before the resulting shares are sold. Whilst the additional requirements which were announced yesterday in relation to distributable profits and net assets will not apply where the shares are “relevant EMI shares”, the extended holding period will apply to ER in respect of EMI options. This means that the underlying option must, from 6 April 2019, be granted 24 months before the resulting shares are sold to qualify for ER.
Whilst this makes qualifying for ER through EMI more difficult, it will have less of an impact on claiming ER in respect of EMI options as compared to claiming ER under the “normal” tests. This is because EMI options which have been granted recently or will be granted soon may be unlikely to be impacted (as such companies are not likely to be preparing for an imminent sale) and for EMI options granted some time ago, the change should not have a material impact as the options may have been granted more than 2 years before this change takes effect. Therefore, and particularly in light of the additional requirements to claim ER under the “normal” tests, it remains the case that EMI options are an attractive way for entrepreneurial businesses to incentivise key members of staff. Indeed, it may be the case that the EMI “gateway” into ER will become a well-trodden path in circumstances where it is difficult to satisfy the new “normal” tests.
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