Share and share alike

Recent research shows that 30% of family companies pass to the second generation, and 13% pass to the third generation. It is my experience that family owned and family run companies show a resistance to dilute shareholdings by bringing in non-family members.

However, what happens when there is no obvious family succession route? In such instances the exit strategy will be either liquidation or a sale. Many business owners will prefer a sale, which will leave a legacy, keep people in employment and maximise the exit proceeds.

It is in this situation that I foresee Enterprise Management Incentive (EMI) share options becoming more and more popular.

EMI share options are a government approved share option scheme which brings about tax advantages.

Companies with no obvious succession route may employ some key non-family members who they need to retain, up to the point of sale, to maximise the value of the company but they do not wish to dilute the family control in the meantime.

In such circumstances, if the trade qualifies, the key employee could be granted EMI share options that are only exercised on the company sale. Such options will, of course, lapse should the employee leave.

How it works

The employee has the right to acquire a small portion of shares in the event of a company sale; the price to be paid is set now, usually at today’s market value for a minority holding. This will be within an EMI wrapper.

On sale, the employee exercises the right and pays the amount for the shares set, as above. The employee pays no income tax or NIC on the growth in value over the time the option is held yet the company obtains corporation tax relief for the growth.

The employee receives a proportion of the sale proceeds upon the sale which is subject to Capital Gains Tax (CGT) on the difference between proceeds received and the amount paid for the shares.

Recent changes to the tax rules have improved the CGT position . The 10% entrepreneurs relief rate of CGT will now be applicable even if the holding is less than 5% (usually a shareholder needs at least 5% to qualify for the 10% rate). Furthermore, the employee only needs to have held the option for at least a year, (not the actual shares unlike the normal 10% CGT rules).

In order to implement such schemes the accountant or tax adviser will work with a solicitor who will be responsible for drafting the option agreement and the scheme rules. The accountant will ensure the trade and the individuals qualify, agree a share valuation with HMRC and register the options.

In summary, family owned companies, where the exit plan is a third party sale as opposed to family succession, will need to consider retaining its key employees. If dilution of ownership is not an option then an EMI share scheme could tick all your boxes.


Nigel Holmes, Director - Corporate Tax

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