Policy paper

Employee share schemes: simplification

Published 16 March 2016

Who is likely to be affected

Individuals who exercise an Enterprise Management Incentive (EMI) option to acquire shares, where those shares are then subject to a rights issue on or after 6 April 2016.

General description of the measure

The measure simplifies the law so that a rights issue which takes place on or after 6 April 2016 in respect of shares received on exercise of an EMI option will be treated in the same way for share identification purposes as other rights issues.

Policy objective

The measure support the government’s objective to simplify the tax system.

Background to the measure

A tax information and impact note (TIIN) containing a summary of impacts entitled “Employee share schemes: simplification of the rules” was published by HM Revenue and Customs (HMRC) on 9 December 2015, together with draft clauses for Finance Bill 2016. The TIIN and draft legislation dealt with a number of different elements relating to both tax-advantaged and non tax-advantaged employee share schemes. Please refer to that TIIN, which still stands, for information about the impact of those elements.

This TIIN deals only with the impact relating to the time limits for the exercise of EMI options. When Finance Act 2013 extended the time limit for employees to exercise EMI options without loss of tax and NIC reliefs following a disqualifying event from 40 to 90 days after the event, it did not update a corresponding time limit for capital gains tax (CGT) in Part 4, Schedule 7D to the Taxation of Chargeable Gains Act 1992 (TCGA). A draft clause for the Finance Bill 2016 (published for consultation on 9 December 2015) corrected this.

Following a representation made in response to the draft legislation, the government has now concluded that since the ending of business asset taper relief in 2008, the whole of Part 4 of Schedule 7D to TCGA has lost its original purpose and should therefore be repealed. In the absence of taper relief the government no longer believes that there is any reason why the date of acquisition of shares on a rights issue should vary depending on whether the original shares were or were not acquired by exercise of an EMI option. This conclusion was tested with stakeholders through informal consultation in January 2016 and welcomed by them. The repeal proposed by Finance Bill 2016 removes nearly a page of legislation.

Other changes to the employee share scheme rules published on 9 December 2015 will appear in the Finance Bill 2016 unamended.

Detailed proposal

Operative date

The measure will have effect for rights issues and disqualifying events occurring on or after 6 April 2016.

Current law

The taxation of chargeable gains in relation to tax-advantaged share schemes is dealt with in Schedule 7D to TCGA.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to repeal Part 4 of Schedule 7D to TCGA. The effect of the repeal will be that a rights issue which takes place on or after 6 April 2016 in respect of shares received on exercise of an EMI option will be treated in the same way for share identification purposes as other rights issues: the new shares will be treated as acquired at the same time as the original shares.

Summary of impacts

This table deals only with the impact of the EMI option element of the overall package of measures relating to simplification of the rules relating to employee share schemes. The impact of the other elements was set out in the TIIN relating to that measure, which was published on 9 December 2015.

Exchequer impact (£m)

2016 to 2017 2017 to 2018 2018 to 2019 2019 to 20120 2020 to 2021
negligible negligible negligible negligible negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure simplifies the law so that a rights issue which takes place on or after 6 April 2016, in respect of shares received on exercise of an EMI option, will be treated in the same way for share identification purposes as other rights issues.

The measure will affect only those limited number of individuals who exercise an EMI option to acquire shares, where those shares are then subject to a rights issue. The latest data shows that in the tax year 2013 to 2014 5,000 individuals exercised EMI share options. Of those individuals, the change will only affect an individual who has exercised an EMI share option and then, instead of selling the shares has continued to hold them until the company has declared a rights issue (itself a rare occurrence), to which that individual has then subscribed. The change will affect the acquisition date for those shares. For some shareholders, compared with the previous rules, this will give a larger allowable cost and therefore lower chargeable gain and others a lower allowable cost and therefore higher chargeable gain, depending on the performance of the underlying shares over the relevant period.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

The measure affects those receiving EMI options who are likely to be employees of above average income. The equality impacts will therefore reflect those protected equality groups represented in this population.

Impact on business including civil society organisations

This measure is expected to have no impact on businesses or civil society organisations because it affects individuals only.

Operational impact (£m) (HMRC or other)

The additional costs for HMRC in implementing the change are anticipated to be negligible.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact Tom Rollinson on Telephone: 03000 585167 or email: tom.rollinson@hmrc.gsi.gov.uk.