All chargeable gains made after 6 April 2008 are charged at a flat rate of 18%. Taper relief was abolished on the same date so the distinction between business and non-business assets is now irrelevant.

A new entrepreneur’s relief is now available in respect of:

  • disposals of shares in a trading company (the old taper relief rules which determined whether a company is a trading company apply for these purposes);

  • employees and officers (including company directors) who own at least 5% of the ordinary share capital of the company and who exercise at least 5% of the voting rights.

Individuals must have held the shares for at least one year to qualify. Gains are charged at an effective rate of 10%. Only the first £1 million of lifetime gains are eligible for the relief.

To view HMRC’s FAQs on entrepreneur’s relief click here: http://www.hmrc.gov.uk/cgt/entre-faqs.htm

Entrepreneur’s relief will generally be of no value to employees other than in the rare instances where they hold more than 5% of the company.

The impact of these changes on the different types of plan in which employees typically participate is outlined below:
































Type of share plan / participant:


Tax rate for participant selling immediately after acquisition of shares (assuming annual capital gains tax allowance used up in respect of other gains):


Tax rate for participant selling two years or more after share acquisition (assuming full business asset taper relief but annual allowance already used up):


SAYE or CSOP, basic rate taxpayer


2% less (18% compared to 20%).


13% more (18% compared to 5%).


SAYE or CSOP, higher rate taxpayer


22% less (18% compared to 40%).


8% more (18% compared to 10%).


SIP


Capital growth within a SIP remains tax-free.


Capital growth within a SIP remains tax-free.


EMI options, higher rate taxpayer (assuming they are ineligible for entrepreneur’s relief)


8% more (18% compared to 10%, assuming exercise 2 years or more from grant, since taper relief used to run from the date of grant of EMI options).


8% more (18% compared to 10%, since taper relief used to run from the date of grant of EMI options but this was the maximum taper relief anyway).


Unapproved share options higher rate taxpayer


22% less (18% compared to 40%) Note: typically there is no gain as the base cost is equal to market value of the shares when the option is exercised.


8% more (18% compared to 10%) on gains in excess of market value on exercise.


Restricted shares with s.431(1) election


Usually N/A


8% more (18% compared to 10%)

Mitigation

Shareholders can generally spread their sales over different tax years to make best use of their annual allowances.

It also remains possible for spouses to transfer shares to each other at ‘no gain no loss’ to make best use of their annual allowances. Note: the transferee spouse must hold at least 5% of a trading company for more than a year in his/ her own right and be an employee or office-holder to qualify for entrepreneur’s relief.

In the case of SAYE options, it remains possible for employees to transfer the shares into an ISA free of tax provided this is done within 90 days of exercise. This is subject to the ISA limit (currently £7,200 in tax year 2008/09). The use of ISAs with SAYE options is not common at present but in the light of the capital gains tax changes it is worth employers reconsidering offering this facility to their SAYE plan participants.

Shares can remain in SIPs after 5 years. When shares are eventually transferred out of the SIP, the base cost for CGT purposes is uplifted to market value at the time of transfer. This allows SIPs, in effect, to be used as an ISA. The higher fixed rate of CGT may make SIPs more attractive in the future as a CGT shelter.

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