Capital Gains Tax - curious thinking by the Chancellor?

Posted by Jennifer at 10:55 on 12 Apr 2016


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).