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Capital Gains Tax - the Coalition proposals

Posted on May 25, 2010

The Programme for Government issued by the Coalition included some proposals for changes to capital gains tax. However very little information has been released to date and this has caused uncertainty for business owners, company directors and participants in employee share schemes.

Further clarification will be given in the emergency Budget on June 22nd. Ahead of further announcements, what action, if any, should companies and stakeholders be considering?

The Programme for Government states that the Coalition intends to seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities. From this we can assume that CGT on normal stocks and shares will rise to a top rate of at least 40%. It is to be hoped that some method will be introduced to compensate for inflation, otherwise the new tax will amount to straightforward confiscation.

Sell now or hold on?

The consequence of this will be a rush to sell by those who hold ordinary stocks and shares and indeed this sell-off is already taking place. However, this may be premature. It is technically difficult to change tax rates mid-way through a financial year and many observers conclude that the new rates will not apply until April 6th 2011. Cynics point out that the Coalition may not survive until then. Meanwhile, pessimists speculate that the changes will be made retrospective to 6th April 2010. Retrospective tax changes are generally reserved for tax avoidance, however, so we regard this as relatively unlikely.

Defining business assets

What will qualify as business assets and what will be regarded as entrepreneurial activities?No guidance has been issued. It is to be hoped that the definition of business asset will be similar to the one which applied to Labour's taper relief regime, namely shares in unlisted companies, shareholdings of 5% or more in quoted companies and shares held by directors or employees of quoted companies. It is also to be hoped that business asset treatment will be extended to government sponsored employee share schemes, such as the Enterprise Management Incentive, Company Share Option Plan and Savings-Related Share Option Scheme. The latter two have formed part of the business policy agenda of successive governments for the last 30 years.

The applicable tax rate

Private shares may qualify as business assets but this is no guarantee that they will not be taxed more heavily. Against this background, some private company shareholders are considering a quick sale of shares ahead of the Budget. The danger here is that assets could be sold off prematurely, for less than their real value, to forestall a tax rise that never happens or is relatively minor.

For those who are determined to sell, however, and cannot find a buyer, a sale to an employee benefit trust may be an option. A sale into trust could also be considered if, as is often the case, the trust has granted share options but not yet acquired all the shares it needs to satisfy option exercise.

For further details on all the above issues, please call us on 020 8949 5522.

 
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