News and Press
Pre - Budget Report: Capital gains tax taper relief

Investors selling companies on or after 6 April 2008 will no longer benefit from taper relief. Any capital gain made on disposals after 6 April 2008 will be subject to a flat rate of 18% tax. 

Taper relief tended to favour investors who held shares in "unlisted" companies (a definition which included AIM listed companies) over listed companies (such as companies listed on the FTSE). It meant that as little as 10% CGT (Capital Gains Tax) would become payable when an investor sold shares which had been held for two years or more.

It appears that it will not matter from 6 April 2008 whether you hold shares in a private, AIM or fully listed company, or indeed how long you hold them - when you dispose of shares you will be taxed at 18%.

How taper relief affected share sales

Where a company is sold, the purchase price usually consists of some combination of three elements- cash, and loan notes and shares in the purchasing company. The CGT payable on the sale of the company's shares is usually deferred until loan notes received are redeemed, or the shares received as purchase price are sold.

An investor who had not held his shares for 2 years or more would often be able to take advantage of taper relief by taking shares or loan notes in satisfaction of the purchase price for his shares. With careful drafting, this could have the effect of deeming the investors holding period to be extended to the necessary two years, with the result that on the sale of the shares or redemption of those loan notes, a CGT charge of only 10% would apply.

How will the changes affect shares sales going forward?

Anyone selling shares before 6 April 2008 and who has held those shares for two years or more will need to take cash if the 10% CGT rate is to apply. For most investors, taking loan notes will no longer work to preserve or enhance taper relief.

How will this impact on people who have already sold their shares but took loan notes in satisfaction of the purchase price?

Now, if loan notes are redeemed after 6 April 2008, it appears that an 18% CGT charge will be waiting.

This will not be bad news for some investors. Those investing in non-trading companies (typically property investors), and those who want to make a very quick return on their investment would not have been eligible for the 10% CGT rate in any event. An 18% CGT rate could provide those investors with a welcome tax cut. Previously, such investors would be liable for a CGT rate of up to 40%.

The investors who will really be adversely affected are those who would have anticipated being eligible for the 10% CGT rate when they came to redeem those loan notes. It may be possible in some cases to bring forward the redemption of loan notes before 6 April 2008, in order to bring the CGT charge within the taper relief regime.

How will this impact on employee share plans?

Start-ups and SMEs

Enterprise Management Incentives (EMI) remain attractive but they are not as attractive as they once were. Under the current tax regime, if you sold shares acquired under an EMI Option more than 2 years after it was granted you paid 10% tax - now you will pay 18%. The positive "spin" on this is that shares sold within 2 years of the grant of an EMI Option will be taxed at 18% rather than 40% or 20%.

AIM listed companies

If EMI is available, the above applies.

Where EMI is not available, Company Share Option Plans may be slightly more attractive post 6 April 2008 than they were previously. That is because CSOP options used to only attract a 10% rate if the shares were sold 5 years after the option was granted - now an 18% rate will be available after 3 years.
It should be noted that EMI, if available, remains more flexible than CSOP even though its tax edge has been diminished.

Established limited and full list

Performance Share Plans are unlikely to be affected too much because they are mainly taxable to income.

All employee share plans may be slightly more attractive post 6 April 2008. The Share Incentive Plan (SIP) is outside of the CGT regime and can provide benefits completely free of tax - that looks better and better. Employees exercising options under ShareSave (SAYE/Savings-Related Share Option Schemes) and selling those shares immediately currently pay capital gains tax at a rate of 40% - the 18% rate is a saving to them.

Conclusions

Investors considering a sale will need to review whether their taper relief entitlement would result in a 10% CGT charge if they sell before 6th April 2008. Investors who have already sold their shares and are waiting to encash loan notes due for redemption after 6th April 2008 should consider whether an early redemption may be possible.

Employers need to review their share plans arrangements to make sure they are tax efficient. They should also review all explanatory material. It may be sensible to put warnings in explanatory booklets of the new changes but wait until the legislation is published to provide fully revised summaries.

Directors and employees may be keen to sell shares before 6 April 2008, and PDMRs need more than ever to be informed of "closed" periods coming up over the next few months.
If you would like more information please do not hesitate to contact Ben Watson, Employee Share Plans, on 0117 917 8811.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2007. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.