
Capital Gains Tax - curious thinking by the Chancellor?
Given the rather unexpected move of the Chancellor in Budget
2016 regarding the reduction in the headline rate of CGT from 28% to 20% for
higher rate taxpayers and from 18% to 10% for basic rate taxpayers, at RM2 we
were scratching our heads as to the direction that the Chancellor really wanted
to be taking the country in relation to CGT.
While there may be very good political reasons why George
Osborne decided to reduce the CGT rate, we question how this fits with the
Government’s efforts to crack down on tax avoidance, the introduction of the
GAAR (i.e. the general anti-abuse rule contained in Finance Act 2013, National
Insurance Act 2014 and with more related legislation coming with Finance Act
2016) and the disclosure of tax avoidance schemes (“DOTAS”) regime (which is
designed to give HMRC information about potential tax avoidance arrangements at
an earlier stage to enable swifter counteraction).
As soon as the gap widens between the rates of income tax
and CGT, inevitably teams of city accountants will be sitting in a darkened
room trying to work out clever ways of exploiting the difference. From such rooms can emerge ideas like “B”
share schemes and growth securities ownership plans (“GSOPs”) both of which are
on the HMRC’s radar (see Spotlight 28 for HMRC’s latest view on GSOPs). The danger is that this situation could move
towards becoming a case of history repeating itself harking back to the days of
exotic tax avoidance schemes like “platinum sponges”.
RM2’s view is to steer clear of such choppy waters and
companies should make sure that an integrated, less aggressive approach has
been adopted where possible involving the HMRC tax-advantaged schemes like
Enterprise Management Incentives (“EMI”), Company Share Option Plan (“CSOP”),
Share Incentive Plan (“SIP”), Save-as-you-Earn (“SAYE”) and Employee
Shareholder Status (“ESS”).
Investors’ relief
Turning to the new investors’ relief announced by the
Chancellor in the Budget whereby a new investors’ relief will apply a 10% rate
of CGT to gains accruing on the disposal of ordinary shares in an unlisted
trading company held by individuals (other than employees or officers of the
company), that were newly issued to the claimant and acquired for new
consideration (on or after 17 March 2016) and that have been held for at least
three years starting from 6 April 2016.
An individual’s qualifying gains will be subject to a lifetime cap of
£10 million.
It seems incongruous to us that there is a 5% holding
required for employees and officers under the Entrepreneurs’ Relief and yet
outside investors can obtain the same 10% rate with having to hold 5% of the
voting shares. The investors’ relief
might however not be as generous as it first appears as it can difficult for
shareholders to extract value from a private unlisted company. HM Treasury currently seems to believe that
it will cost them £130 million in receipts to the Exchequer.
Employee Shareholder Status
Nonetheless, George Osborne was back in crack-down mode with
the reduction of the CGT lifetime limit for Employee Shareholder Status (“ESS”)
arrangements to £100,000 following the high level of use by the private equity
industry. In addition, CGT relief is not
available for amounts that are disguised fees or “carried interest”. By way of explanation, in return for
sponsoring and managing a private equity fund, and to create an incentive to
maximise the fund's returns, the individual fund managers typically receive a
share of the profits realised from the fund's investments, known as
"carried interest". The “carried interest” typically entitles the
individual fund managers to a percentage (often 20%) of the fund's overall
profits after return of capital to investors in the fund. This is in addition
to any salary and bonus to which they may be entitled.
In summary
Our view is that even in this one discrete area of taxation, the Chancellor is sending out mixed messages which can only upset the notion of certainty and clarity of taxation policy which all businesses look for when planning strategically (whether in relation to employee incentivisation or otherwise).