Today saw the last UK Budget before the UK leaves the European Union.
The speech saw limited announcements directly relevant to employee share schemes and equity incentives, save for two important changes affecting the scope of Entrepreneurs Relief (ER).
- The first change is that, while the Chancellor announced that the relief will be maintained in the face of some pressure to abolish it, the minimum qualifying period will be extended from one year to two years.
- Second, in addition to the current requirements on share capital and voting rights, from 29 October 2018 shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company to claim the relief.
The first change is intended to support longer-term business investments. From an employee share plan perspective, it highlights the need to implement share plans at an early stage rather than waiting until close to an exit – allowing employees to maximise the benefit they receive from growth in share value, as well as tax reliefs.
The second change is stated to “address an identified abuse of the current rules”. It is questionable whether most advisers would see the point being addressed as an abuse. It means that the normal structure of ER which has been a feature of the legislation since it was introduced is being abolished, apparently for disposals occurring from today.
This has a number of significant impacts:
- This would seem to be retroactive. In other words, it appears that it will apply to all disposals from today, as a result affecting existing shares and rights and causing entrepreneurs who have owned shares and invested in their companies for many years to lose their expected relief.
- It will make planning to preserve the relief following the receipt of additional funding more difficult, despite the anti-dilution relief due to take effect in 2019.
- It will also have an adverse effect on share rights designed to incentivise participation in the growth in the value of companies (growth shares).
- Conversely, it will make Enterprise Management Incentives (EMI) more attractive as shares acquired through the exercise of EMI options are not required to satisfy the 5% participation test.
- It may also encourage the use of other forms of share incentives (such as joint share ownership plans or JSOPs) which offer a simpler structure but do not qualify for ER.