The Budget 2016: a share scheme summary
The Chancellor’s Budget Statement yesterday had some important – and surprising - announcements relating to share schemes, in particular, the cap on exemption from capital gains tax (“CGT”) for the Employee Shareholder Status arrangement. The significant reduction in CGT rates is also likely to have an effect on planning for employee share schemes, as the differential between income tax and CGT for employee share plan participants is greater than ever.
Employee Shareholder Status (“shares for rights”) – new cap for exempt gains
From a share schemes perspective, the headline announcement relates to Employee Shareholder Status (“ESS”) shares as the Chancellor has introduced a lifetime limit of £100,000 on the capital gains tax (“CGT”) exempt gains that an individual can make on the disposal of shares acquired under ESS agreements entered into after 16 March 2016. This restriction (which unsurprisingly was announced without any consultation) on the CGT relief seems to reflect the popularity of ESS agreements and the associated capital gains tax relief with private equity backed businesses and the financial services sector.
We believe that, despite this CGT relief restriction, an ESS arrangement remains a very good option for small and medium-sized enterprises (“SMEs”) (at whom the tax-advantaged arrangement was originally targeted) as the £100,000 lifetime limit is still generous.
More welcome for individuals will be the reduction of CGT rates from an 18% rate of CGT to 10% for basic rate tax-payers and 28% rate to 20% for higher rate tax-payers (although these new rates will not apply to gains accruing on the disposal of residential property and carried interest).
Entrepreneurs’ Relief – long-term investors’ relief
The government will extend entrepreneurs’ relief (“ER”) to external investors in unlisted companies. This new investors’ relief will apply a 10% rate of CGT to gains accruing on an unlisted trading company held by individuals, that were newly issued to the claimant and acquired for new consideration on or after 17 March 2016, and have been held for at least 3 years starting from 6 April 2016.
These two previous welcome changes (i.e. the fall in CGT rate and investors’ relief) are very much part of the government’s attempts to foster a strong enterprise and investment culture.
In addition, some restrictions on ER introduced last year (relating to the treatment of joint ventures and partnerships and the treatment of associated disposals) have been reversed this year. Unfortunately, the government failed to consider that their original decision caught a number of wholly commercial arrangements and the reversal of the offending legislation will be backdated to effectively nullify the offending sections.
Once again there is an expected continuing focus on tax evasion and avoidance schemes, with the government looking to introduce measures to tackle current and historic use of disguised remuneration avoidance schemes. This will include a new charge on loans paid through disguised remuneration schemes which have not been taxed and are still outstanding by April 2019. From a share schemes perspective, this reinforces the advantages of government recognised arrangements such as Enterprise Management Incentives and other tried and tested approaches to share plans.
Employer NICs on termination payments (April 2018)
From April 2018, the government intend to tighten the scope of the income tax exemption for termination payments to prevent manipulation. In addition, termination payments over £30,000 which are subject to income tax will also be subject to employer’s national insurance contributions (NICs). A technical consultation has also been promised to look at tightening the scope of the exemption.
Loans to “participators” tax rate change
The government will increase the loans to participators tax rate from 25% to 32.5% so that this rate is aligned with the new higher rate of dividend income. The new rate will apply to loans made or benefits conferred by close companies (usually to director/shareholders) on or after 6 April 2016.
Employee Share Schemes – simplification of the rules
Finance Bill 2016 will introduce a further minor change relating to EMI options, where those shares are then subject to a rights issue among with a number of other changes already announced in the Autumn Statement 2015 (draft legislation published on 9 December 2015). The other changes published in the draft legislation on 9 December 2015 will appear in the Finance Bill 2016 unamended.
Salary sacrifice arrangements
The government is considering limiting the range of benefits that can take advantage of the income tax and NICs advantages of a salary sacrifice scheme. However, the government have stated that they do not intend to curb the use of salary sacrifice schemes for pension saving, childcare and health-related benefits (e.g. Cycle to Work).
However, this could have a negative effect on Share Incentive Plans so share plans fans should start getting their arguments together as to why there should be a relevant exclusion for a share plan that otherwise receives cross-party support.
Off-payroll working in the public sector
The intermediaries’ legislation (more often described as IR35) is to be reformed from April 2017. These changes are specifically targeting the public sector (following the high-profile cases of abuse involving the BBC). However, in the enclosed technical note, HMRC have stated that the existing intermediaries’ rules will continue as they are now for non-public sector engagements.
The Finance Bill 2016 will be published on Thursday 24th March.