HMRC Announces New CGT Reliefs

by Amanda Banks, Tax-News.com, London

28 January 2008

Following strong criticism of recently announced changes to the UK's capital gains tax regime, new CGT relief for entrepreneurs was unveiled by the UK Chancellor of the Exchequer on Thursday, although it has met with a mixed reception.

The new relief will be targeted at owners of small businesses, and will apply when they sell their business. The relief will also be available to all employees and company directors who invest a material stake in a qualifying company.

It will take effect from 6 April 2008, alongside the rest of the capital gains tax reform package.

The relief will deliver a 10% tax rate for up to the first GBP1m of lifetime capital gains. Individuals will be able to claim relief for gains made on multiple occasions up to a cumulative total of GBP1m.

Gains in excess of the GBP1m lifetime limit will attract the standard 18% rate of tax.

In addition to the entrepreneurs' relief announced on Thursday, the Government announced that it "is also continuing to deliver targeted support through the Enterprise Investment Scheme and Venture Capital Trusts".

"These initiatives provide a range of income tax and capital gains tax reliefs to individual investors, helping to improve access to full-risk equity finance for small businesses," the Treasury stated

However, it has been argued that the new changes to the capital gains tax could negatively affect over 270,000 Save As You Earn (SAYE) employee shareholders – 16% of the 1.7 million employees participating in SAYE schemes.

According to ifs ProShare, the not-for-profit organisation that supports employee share ownership in the UK, the current CGT regime means that basic rate taxpayers who have held shares in their employer for at least 2 years are only subject to a 5% CGT charge.

The Chancellor’s changes mean that these employee shareholders will have to pay an additional 13% tax on any gain above GBP9,200 from April 2008.

ifs ProShare argued that this means that employees who have contributed to the success of their employers are now going to be worse off than under existing legislation, whilst non-employee shareholders who have not done so are to have their CGT liabilities substantially reduced (from 40% to 18%).

The changes are also likely to have some impact on medium and long term saving through employee share ownership, damaging moves towards wider share ownership as a means of saving for the future.

Fiona Downes, Head of Employee Share Ownership at ifs ProShare, explained that:

“Having informed the Chancellor of the fact more than 270,000 employees could be worse off following his proposals, we are naturally disappointed that this evidence appears to have been ignored."

"As well as there being no changes to mitigate the effects on employee shareholders, the uncertainty and repeated delays in confirming this decision mean many employee shareholders will have to make relatively quick decisions about whether or not to sell or hold some of their shares. SAYE participants should speak to their employer about the range of choices available to them or seek financial advice," she added, going on to state:

"Employers will also face a real challenge in communicating these implications to their employees within a very short period of time."

"In view of these incredibly tight time constraints a grandfathering arrangement should be introduced so that existing participants in SAYE schemes continue to benefit from taper relief at the current rates."

"ifs ProShare will continue to lobby for Government to act on the concerns of UK employers and employees on this issue," she concluded.

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