Members of employee share schemes will not be spared higher rates of capital gains tax (CGT) from April this year. In his long-awaited concessions on the 18 per cent flat rate of CGT announced in October’s pre-Budget report, chancellor Alistair Darling introduced a lower rate of 10 per cent for lifetime gains of up to £1m on holdings in trading companies, provided the owner has at least a 5 per cent stake (see Entrepreneur, Page 24).
But investors in other assets that used to benefit from taper relief will see their tax rate rise from as little as 5 per cent to 18 per cent in just over 10 weeks.
For 270,000 investors in their companies’ Save As You Earn (Saye) share schemes, this will mean a higher tax bill when they sell their shares, says the workplace advisory organisation, ifsProShare. Its research reveals that there are now 1.7m scheme members and 16 per cent currently make gains above the annual CGT exemption of £9,200.
Under existing rules, these taxable gains qualify for full taper relief if the shares have been held for two years, which reduces the tax due to 25 per cent of the normal rate. “A lot of people who did have tax to pay were basic-rate taxpayers, so they were only paying 5 per cent” points out Patricia Mock of Deloitte, the professional services firm. “This will now rise to 18 per cent.”
Saye scheme members will at least be able to sell their shares at any time under the new rules. “The only small sop is that the two-year holding period goes,” explains Mock. But this does nothing to compensate members of Enterprise Management Incentive (EMI) schemes, as they used to qualify for taper relief with no holding period.
As a result, shareholders with taxable gains will have to sell before April to avoid the higher rate. “The uncertainty and repeated delays in confirming this decision mean many employee shareholders will have to make relatively quick decisions,” says Fiona Downes, head of Employee Share Ownership at ifsProShare. “Having informed the chancellor that employees could be worse off following his proposals, we are naturally disappointed that this evidence appears to have been ignored.”
Investors in shares traded on the Alternative Investment Market (Aim) may also be disappointed to lose their taper relief. “This means that ordinary investors in qualifying Aim shares and unlisted companies who are not employees or directors will be worse off,” says Jason Hollands of F&C Investments. “Currently, they can enjoy a 10 per cent CGT rate after as little as three years. Now they will pay 18 per cent.”
But while this removes the tax advantages of Aim shares over main-market holdings, they are still not eligible for inclusion in tax-efficient individual savings accounts (Isas).
“It is completely anomalous that they should no longer be available for Isas or Peps. It’s something that should be tidied up in the next Budget,” Hollands adds.
Many company directors who own shares in their companies will be hit too, as their holdings will not be above the 5 per cent needed to qualify for the new “entrepreneur relief” rate of 10 per cent.
“For very large publicly- quoted companies, this will also catch the share dealings of directors and employees whose holdings in the company may be very valuable but are unlikely to exceed 5 per cent,” comments George Bull, head of tax at Baker Tilly, the business advisers.
“This may be a covert attempt by the Treasury to tackle generous share incentive plans for company directors.” And, for many, selling up before April may not be an option. “They are limited in what they can do,” says Mock. “They may be going into closed periods, or there may be requirements on the shares they need to retain.”
