2008 Budget: Impact on employee schemes
We set out below the impact of the changes announced in the 2008 Budget affecting CGT and employee share schemes.
Please note also that, in relation to EMI schemes, the following further changes are to take effect from 6 April 2008:
- Increased individual limit of £120,000
- No options may be granted by a company with 250 or more employees or whose business is production of coal or steel or shipbuilding.
This compares the current capital gains tax (CGT) treatment (for disposals up to 5 April 2008) and the proposed new treatment after that date.
Please note that in relation to shares acquired under any of the arrangements described below, the current CGT treatment will apply to disposals of those shares up to 5 April 2008:
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Current CGT treatment |
Proposed new CGT treatment |
EMI options
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Taper relief may reduce the taxable amount by 50% (for share disposals one year or more after option grant) and by 75% (for share disposals two years or more after option grant). For a higher rate taxpayer, this means CGT rates of 20% or 10%
Annual exemption also applies. |
Basic position
Removal of taper relief will mean that a standard CGT rate of 18% applies, whatever the period between option grant and disposal of the shares.
Entrepreneurs' relief
However, in limited cases a 10% rate will apply on the first 1m of gains where conditions are met*.
In both cases, annual exemption will continue. |
CSOP options
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Taper relief may reduce the taxable amount by 50% (for share disposals one year or more after option exercise) and by 75% (for share disposals two years or more after option exercise). For a higher rate taxpayer, this means CGT rates of 20% or 10%
Annual exemption also applies. |
Basic position
Removal of taper relief will mean that a standard CGT rate of 18% applies, whatever the period between option exercise and disposal of the shares.
This will be an improvement for many CSOP participants who are higher rate taxpayers, as an immediate disposal of shares following exercise of a CSOP option (as often happens on a sale of a company) will now attract CGT at 18% instead of 40%.
Entrepreneurs' relief
However, in limited cases a 10% rate will apply on the first 1m of gains where conditions are met*.
In both cases, annual exemption will continue. |
SAYE options
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Taper relief may reduce the taxable amount by 50% (for share disposals one year or more after option exercise) and by 75% (for share disposals two years or more after option exercise). For a higher rate taxpayer, this means CGT rates of 20% or 10%
Annual exemption also applies. |
Basic position
Removal of taper relief will mean that a standard CGT rate of 18% applies, whatever the period between option exercise and disposal of the shares.
This will be an improvement for participants making high levels of capital gain, as an immediate disposal of shares following exercise of a SAYE option (as often happens on a sale of a company) will now attract CGT at 18% instead of 40%.
Entrepreneurs' relief
However, in limited cases a 10% rate will apply on the first 1m of gains where conditions are met*.
In both cases, annual exemption will continue. |
| * shares have been held by an employee or director at least one year between option exercise and sale, and that person held at least 5% of the company, with at least 5% voting rights |
Share Incentive Plan (SIP) |
No CGT whilst shares are held in SIP |
No material impact. |
Shares beneficially owned
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Taper relief may reduce the taxable amount by 50% (for share disposals one year or more after shares acquired) and by 75% (for share disposals two years or more after shares acquired
Annual exemption also apply.
For restricted shares, part of growth may also be subject to income tax and National Insurance unless the holder and the company have elected to pay income tax upfront on any discount resulting from the restrictions. |
Basic position
Removal of taper relief will mean that a standard CGT rate of 18% applies, whatever the period between acquisition and disposal of the shares.
This will be an improvement for many participants, as a disposal of shares will now attract CGT at 18% instead of 40%. An advantage is that a lower rate of tax is available without having to own shares for any period before disposal. A disadvantage is that the lowest rate of CGT will be 18% rather than 10%.
Entrepreneurs' relief
However, in limited cases a 10% rate will apply on the first 1m of gains where conditions are met*.
In both cases, annual exemption will continue.
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Non-approved options |
Gains are subject to income tax and National Insurance, not CGT |
No change to tax on option gains when options are exercised. |
| This should be treated as general guidance only and is not to be regarded as advice, which should always be taken in the context of a company's own particular circumstances. Tax treatment and other laws are always subject to change. Copyright POSTLETHWAITE 2008 |
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