Employee share schemes are an invaluable way to not only incentivise employees but to retain talent. The doubling of the Company Share Option Plan (“CSOP”) individual limit from £60,000 to £120,000 and the removal of the interaction between CSOP and Enterprise Management Incentive (“EMI”) limits has enhanced the attractiveness of these arrangements. In particular, the changes afford business owners greater flexibility to incentivise and retain key employees, while enabling participation by a broader segment of the workforce.
Founders Relief (“FR”) resulting in a 10% rate of Capital Gains Tax (“CGT”) with a net benefit of circa £1.4m on a £10m disposal sounds great as a headline, but the available details indicate that satisfying these conditions will be a challenge to most companies. The investor should have held 25% of shares on commencement of trade, and in the preceding 5 year, have been both a UK resident and help the shares in the company. On the other hand, the company is expected to meet two of three strenuous conditions such as either a 25% compound increase in 3 consecutive years in turnover or employees or at least £1.5m qualifying R&D expenditure.
As you can imagine, there is a risk that this relief becomes more of a theoretical benefit than a practical one if the current conditions prevent taxpayers from accessing it. Encouragingly, HMRC has opened a consultation on the relief, providing an opportunity for dialogue and stakeholder input. We will monitor this consultation and hopefully this will result in a more workable set of conditions that allows the relief to be accessed by those it is intended to support.
Business Asset Disposal Relief (“BADR”) On the downside, the lifetime limit for an individual can claim was reduced from £1m to £500,000 (effectively a £30k increase in CGT). For business owners looking to exit in the very short run, there is somewhat an incentive to dispose of your business prior to 6 April 2027, although I will hasten to say the motivation/timing of disposing a business should never be tax driven.
I will be happy to discuss any pre-transaction planning that could help you maximise value and manage tax risks ahead of the transaction.