With all the attention on Coronavirus and the devastating impact on many businesses, there is less focus on what now seems like minutiae from the Chancellor’s budget on 11th March.
One area which will impact on employee share schemes is the restriction on Entrepreneurs’ Relief.
This is now being renamed as Business Asset Disposal Relief. It is not clear why the name is being changed, although it might be thought to make a subsequent abolition of the relief entirely easier to present politically.
In addition, HMRC have now provided additional guidance on the substantive changes. These are reflected in the following paper from HMRC: ER Restrictions. This confirms that the lifetime limit for ER is to be reduced from £10m to £1m with anti-forestalling provisions which have the effect of applying the new rules to any disposal entered into before 11th March which have not been completed.
It remains to be seen what effect these changes will have on the design and operation of employee share schemes. Our initial comments are:
(i) The substantial reduction in the value of ER is likely to mean that structuring share rights to obtain the relief will be a less significant factor than has previously been the case.
(ii) This will result in companies and participants being less inclined to seek to operate Growth Share plans with complex share rights and more likely to consider joint share ownership plans and more inclined to seek to adopt joint share ownership plans (or JSOPs).
(iii) The availability of ER will continue to be an incentive for companies to adopt Enterprise Management Incentives (EMI).