Capital Gains Tax
The expected rise in capital gains tax (CGT) was announced in today's Emergency Budget. For employees who sell shares in their employing company, the CGT liability on their chargeable gain looks as follows:
10% for taxpayers who meet the tests for Entrepreneurs' Relief (broadly, employees or directors who hold at least 5% of the shares in their employing company for at least a year before they dispose of them) up to the new lifetime limit of £5m.
28% for higher rate tax payers who do not qualify for Entrepreneurs' Relief.
18% for basic rate tax payers who do not qualify for Entrepreneurs' Relief and whose income, when taken together with their chargeable gain (less allowances), is less than or equal to £37,400. The 28% rate will apply to any excess.
It is notable that Entrepreneurs' Relief has not been extended to employees holding less than 5% of the issued share capital of their employing company. Such employees will now pay CGT at 18% or 28% when until 2008 they could pay CGT at 10%. This is surprising, especially given the statements made earlier this year by George Osborne of his intention to facilitate greater employee ownership in public services.
Thoughts for the future?
Share Incentive Plans - if shares are retained by an employee in a Share Incentive Plan for at least 5 years, there will be no income tax or CGT to pay when the shares are taken out of trust. The base cost on the sale of such shares is the market value of the shares when they are taken out of trust. As the trust can be structured so that the shares do not have to be removed at the end of the five year period, a complete CGT shelter is available.
Entrepreneurs' Relief - if an employee would reach the 5% level required for Entrepreneurs' Relief on exercise of his share options, he should if possible exercise the options at least one year prior to the likely sale of the option shares.
Directors and employees who hold shares in their employing company in excess of 5% should consider the dilutive effect of the issue of new shares in the Company eg to investors or on the exercise of share options. This could result in their holding falling below 5% and Entrepreneurs' Relief being lost.
Geared Growth and Employment Related Securities
Plans for a consultation on geared growth and employment related shares and securities announced in March have been confirmed. This is generally viewed as a reference to private equity structures but could include growth share plans, where executives acquire shares at a low value as they have no right to share in the current value of the company but do share in future growth. That growth in value is currently subject to the CGT regime rather than income tax.
Enterprise Management Incentives
And for the third time...we have been promised that there will be legislation to formalise the proposed relaxation of the requirement for an EMI qualifying company to carry on a trade "wholly or mainly" in the UK to a requirement that there is a "permanent establishment" in the UK.
A Last Reminder -
HMRC Annual Returns for Option Plans and Employment Related Securities
All HMRC annual returns for option plans and employment related securities must be filed with HMRC in paper format before 7 July 2010. Note that online filing has been withdrawn from 1 April 2010.
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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.