OTS considers aligning Capital Gains Tax (CGT) and Income Tax rates, and their comments on employee share schemes
The Office of Tax Simplification’s (OTS) first report following their CGT review was published on 11th November (Report). The Report focuses on the policy design and principles underpinning CGT and is wide ranging, however, this article focuses on the OTS’s comments on:
- aligning the CGT and income tax rates; and
- employee share option and share ownership plans.
The OTS’s view
One recommendation made in the Report is that, if the government is considering changes to CGT they should “consider taxing more of the share-based rewards arising from employment … at Income Tax rates.” This could be bad news for employees who participate in employee share option plans (and other share ownership plans) as one would expect that CGT rates would then be increased to income tax rates, rather than income tax rates being cut. However, employee share option plans have a number of purposes including attracting, incentivising and retaining employees and while the loss of any tax-advantages could make them less attractive, there are still good reasons for adopting them e.g. increasing employee motivation and commitment and aligning employees’ interests with those of investors. More information about employee share schemes can be found here .
While the report acknowledges that it is for the government to determine the principles behind CGT, especially if there are policy reasons for not aligning rates, it doesn’t appear to have considered the benefits of employee ownership for companies, both financially and otherwise.
More broadly, the Report also considers reducing the CGT annual exemption and replacing Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), (which reduces the rate of CGT to 10% where it applies) with a retirement focused relief.
The Report’s tone is generally sceptical about the efficacy of employee share option plans, even in respect of the ‘all-employee’ plans whose cost effectiveness was questioned as was the lack of access by “many millions of lower paid employees”. Growth shares receive a special mention as being tax-driven.
The Report does acknowledge that tax advantaged share schemes reflect policy choices, with the all-employee plans (Share Incentive Plans (SIP) and Save as You Earn (SAYE)) having social policy objectives and the other tax advantaged plans (Enterprise Management Incentives (EMI) and Company Share Option Plans (CSOP)) having economic policy objectives.
What happens next?
The OTS’s second report is due to be published early next year and we expect this to focus on key technical and administrative issues. We will provide an update on this, if relevant, and on any developments resulting from the publication of the Report.
How tax rates and exemptions are set can affect company behaviour, for example the tax reliefs for employee ownership trusts have encouraged company owners to look at them as a succession route (with now around 500 businesses employee-owned), although we’d recommend tax shouldn’t be the decisive factor.