Shares acquired on exercise of EMI options will be able to qualify for entrepreneurs' relief even if the individual does not have a 5% stake in the company

Where capital gains qualify for entrepreneurs' relief the rate of capital gains tax is 10%, rather than the normal 18% and 28% rates.

Individuals qualify for entrepreneurs' relief on disposals of shares if they meet the conditions throughout a one year qualifying period, ending with the date on which they sell the shares.

The company must be a trading company or the holding company of a trading group. The individual must be an officer or employee of the company and the individual must hold at least 5% of the company's ordinary share capital, giving the individual at least 5% of the voting rights in the company.

Where employees hold shares acquired by exercising EMI options the individual will often not hold the required 5% stake in the company. This means that they cannot qualify for entrepreneurs' relief when they dispose of their shares, even if they meet all the other conditions, meaning that capital gains tax is payable at 18% or 28%, rather than 10%.

An HMRC technical note announces that it is proposed that the requirement for the indvidual to hold at least 5% of the shares will be removed where shares are acquired as a result of exercising EMI options on or after 6 April 2012.

However the technical note confirms that all the other conditions for entrepreneurs' relief will have to be satisfied. In particular, once the EMI options are exercised, the individual will have to hold the shares throughout the one year qualifying period. This means that for an EMI option exercised on 6 April 2012, the earliest time the shares could be sold and qualify for entrepreneurs' relief would be 6 April 2013.

"This is an improvement on the current position, but in requiring the shares to be held for at least a year after the options are exercised, it does not address one of the main problems with the interaction between EMI and entrepreneurs' relief," said Judith Greaves, a share plans expert at Pinsent Masons, the law firm behind Out-Law.com. "Most people want to or , in the case of exit options, may have to, sell their shares as soon as their options are exercised and, if they do, even after the change, they will not get the benefit of the 10% rate of CGT."

The legislation will be included in the Finance Bill 2013 and draft legislation will be issued for consultation in the autumn, according to the technical note.

EMI options are intended to help smaller companies with growth potential to recruit and retain the best employees, and offer generous tax advantages to employees of those companies which qualify.

The Chancellor announced at the Budget that it is intended to raise the limit for the value of shares over which EMI share options may be granted to any individual from £120,000 to £250,000. This measure will take effect for options granted on or after a date which is yet to be specified, and is subject to State Aid approval.