Coalition budget: major advantages remain for employee share schemes
The Budget decision to raise the top rate of capital gains tax to 28% still leaves major advantages for most employee share schemes.
The new rate is still well below the higher rates payable on income. The national insurance savings also remain. Contrary to pre-budget speculation, the annual tax-free allowance of £10,100 is retained and will rise in future years in line with inflation. Gains realised through a tax-efficient share scheme will now attract 47.9% less tax and NI than benefits paid through cash bonuses, LTIPs or other arrangements. If the participant is a 50% income tax payer, the saving rises to 56.1% In this case, £35.80 less is paid in tax for every £100 of gain.
The picture is even more attractive for shareholders qualifying for Entrepreneur's Relief. An effective capital gains tax rate of just 10% now applies to the first £5 million of lifetime gains, up from £2 million. To qualify for this relief, 5% or more of the voting shares must be held for a year or more and the shareholder must be an employee or officer of the company.
The tax benefits are not the whole story. Share schemes continue to be an effective way for companies, especially SMEs, to offer substantial rewards while conserving cash. Additionally, unquoted companies can normally get HMRC to agree to very low valuations for shares used in employee schemes. This means that the securities can be offered with a large, built in endowment of value, which can be realised on eventual exit through sale or flotation. For tax-advantaged schemes, this initial value also qualifies for the favourable capital gains tax treatment.
The schemes subject to favourable capital gains tax treatment are the Enterprise Management Incentive (EMI), the approved Company Share Option Plan (CSOP) and the Save-As-You-Earn (SAYE) Share Option Scheme. All these are government sponsored. Certain other share schemes are also within the capital gains tax regime, notably the Deferred Share Purchase Plan (DSPP). Call us on 020 8949 5522 for more details.
The Coalition has also today re-affirmed its support for the EMI scheme, and by implication the other government sponsored schemes, saying that the continuation of these arrangements is particularly important given the current challenging economic conditions.