Employee share plans: Budget changes

The main Budget announcement concerned an increase in the rate of capital gains tax (CGT).

Capital Gains Tax

From midnight tonight there is an increase in the rate of CGT for individuals whose taxable income and taxable capital gains when added together are more than £37,400.  Their rate of CGT on any gains exceeding the threshold rises from 18% to 28%. However, capital gains tax for any gains below the threshold remains at 18%.

The annual exemption of £10,100 has survived, meaning that the first £10,100 of gains in each year are tax-free (and unlike for the purposes of income tax, this exemption is available whatever the level of gains).

One practical aspect of this change is that deferral of gains into successive tax years through loan notes and spouse transfers may become more popular again.

Also, those holding more than 5% of a trading company in which they work for more than a year can realise gains of up to a lifetime total of £5 million which are only taxable at 10%. The level had been set at £1 million since 2008, then rose to £2 million in Alastair Darling’s last Budget in March and now will rise again to £5 million. However, given the need to have held shares for more than a year and the need to hold at least 5% of the company, not many employee share plan participants will be affected by this.

Other announcements

• There have been no technical changes on particular employee share plans announced other than that EMI share option schemes will soon be able to be operated by companies which have a branch in the UK rather than operate wholly or mainly in the UK. This will marginally extend the scheme and had been required because of EU state aid/discrimination rules.
• As announced by the previous Government, a consultation is being undertaken this year on the taxation of schemes where, for a nominal or small outlay, an employee is able to receive future share growth which is taxed as capital rather than income. The aim is to ensure a proper amount is subject to income tax. The scope of this review is still not clear – it could include “growth shares” and Joint Share Ownership Plans.
• This Government is also continuing to look at the avoidance of income tax and National Insurance contributions through diverting employee earnings through trusts and other vehicles. The intention is to introduce legislation to take effect from 6 April 2011, but no consultation is planned here.