Entrepreneurs' relief EMI shares

Relevant EMI shares
“Relevant EMI shares” are company shares acquired by an individual to which (I) below applies, or company shares to which (II) below applies21.

·        (I) Shares acquired by the individual on or after 6 April 2013 as a result of the exercise of a qualifying EMI option22 exercised on or before the tenth anniversary of23 the grant of the option (or the original option where it is a replacement option)24.

·        However this does not apply to shares acquired on the exercise of the option if a disqualifying event25 occurs before the exercise of the option and it is exercised more than forty days after the date of the event26. If the exercise is within the forty-day period, and thus the shares are relevant EMI shares, the date of disposal in Condition C (ii) is the date of the disqualifying event27. If the disqualifying event is that the company no longer meets the trading requirement, the cessation date in Condition D is the first day after the end of the forty-day period if this is later28.

·         (II) Shares acquired as a replacement for qualifying EMI shares under TCGA 1992 s 127 by virtue of either s 126 (reorganisation of share capital, see D6.101 and D6.202) or, in certain circumstances, s 135(3) (exchange of securities for those in another company, see D6.202 and D6.205)29. The exchange of securities rules only apply to replacement shares where the exchange is a qualifying exchange for EMI purposes30 and, when the exchange occurs, the new company meets the independence and trading requirements31.

Where there is a qualifying reorganisation, the one-year period for company and employment requirements in Condition C (iii) above, and the requirement for acquisition before the cessation date in Condition D apply to the original EMI shares32. Where the qualifying option is a replacement option, the option grant date is date the old option was granted33.

Transitional year 2012-13
The legislation introduced by FA 2013 Sch 24 applies with effect for disposals on or after 6 April 2013 with one exception34. Where shares acquired in 2012–13 would have been relevant EMI shares if the date in (I) above were 6 April 2012 and no disposals of shares of that class were made in 2012–13, then those shares are treated as relevant EMI shares. If the individual did dispose of shares of that class in 2012–13, he can elect for the shares of that class to be treated as relevant EMI shares35. The election may not be made or revoked after 31 January 201436. Where an election is made the legislation has effect for disposals of shares in that class in 2012–1337.

Share for share exchanges
HMRC have confirmed38 that where there is a share for share exchange under TCGA 1992 s 135 treated as a reorganisation under TCGA 1992 s 127, the qualifying time period39 which the taxpayer has accrued in relation to the old company, can be attributed to his relationship to the new company. For example if the taxpayer was an employee of his personal trading company (A Ltd ) for one year, and as part of a share for share exchange with a new company (X Ltd) becomes an employee of X Ltd which also becomes his personal trading company, the holding period will immediately be satisfied in respect of his shares in X Ltd, even though he has just acquired them, and only just become an employee of X Ltd. This is so long as no election is made disapplying the reorganisation treatment40

Dilution ignored when shares sold on day of exercise
Dilution of the shareholding by the exercise of options on the day of sale with the result that the shareholder owns less than 5 per cent of the ordinary share capital will not prevent entrepreneurs' relief being available; see CIOT Notice “Entrepreneurs' Relief—Technical points from HMRC forum”, 13 February 2012, Simon's Weekly Tax Intelligence 2011, Issue 7, p 366. See also www.tax.org.uk/media_centre/LatestNews-migrated/ER.