The Budget on 16 March 2016 included various proposals relevant to operators of, and participants in, employee share schemes as well as businesses encouraging employee share ownership.
Employee Shareholder status: CGT relief subject to lifetime limit
The Chancellor announced a new lifetime cap of £100,000 on the capital gains tax (CGT) relief available for Employee Shareholder shares. This cap will apply to shares issued after midnight on 16 March 2016 as consideration for entering into an Employee Shareholder agreement. Gains up to the lifetime cap will be exempt from CGT, but gains exceeding that level will be chargeable to CGT in the normal way. Gains realised on Employee Shareholder shares issued on or before 16 March 2016 will not count towards the new cap.
Special rules will apply to spouse and civil partner transfers of Employee Shareholder shares which will fix the base cost in the hands of the transferee.
As an anti-avoidance measure, it was also announced that, as from 6 April 2016, Employee Shareholder relief will not apply if the arrangements involve sums which can be characterised as disguised fees or carried interest.
Although some commentators maintain that the new limit will mean that there will be far fewer Employee Shareholder arrangements in the future, we believe that they will be still be attractive in situations at the lower end of the £2,000 to £50,000 acquisition value range.
The Government has indicated that it is concerned that disguised remuneration (payments to employees by third parties) and similar avoidance schemes continue to be used despite the extensive anti-avoidance legislation included in Finance Act 2011. Several measures are being proposed in an effort to eliminate avoidance in this way.
Share scheme simplification
Previously, shares acquired on the exercise of an EMI (Enterprise Management Incentive) option were subject to special rules where there was a subsequent rights issue. Under the Chancellor’s proposals, a rights issue which takes place on or after 6 April 2016 in respect of shares received on exercise of an EMI option will be treated in the same way for share identification purposes as other rights issues: the new shares will be treated as acquired at the same time as the original shares and will share the same tax treatment.
The rates at which CGT is charged will be reduced from 6 April 2016. The higher rate will be reduced to 20% (from 28%) and the basic rate will be reduced to 10% (from 18%). This will make tax-advantaged share schemes even more attractive than previously.
Extension of Entrepreneurs’ Relief
Entrepreneurs’ relief is to be extended to external investors in unlisted trading companies. This relief applies a 10% CGT rate to gains arising on the disposal of ordinary shares in an unlisted trading company held by individuals where the following conditions are satisfied – the shares must have been (a) newly issued to the investor, who must not have been an employee or officer of the company during the period he holds the shares (b) acquired for new consideration on or after 17 March 2016, and (c) held for a period of at least three years starting from 6 April 2016. A lifetime cap of £10 million will apply to qualifying gains under the new relief. Investors eligible for this new relief may also be eligible under enterprise investment scheme relief, so it will be interesting to see how the two reliefs will operate alongside one another.
From April 2018, termination payments that are subject to income tax on amounts in excess of £30,000 will be subject to employer NICs. The £30,000 exemption from income tax will remain and the whole termination payment will be free from employee NICs. Additionally, it is proposed that all payments in lieu of notice and certain damages payments will be taxed as earnings.
There was considerable speculation before the Budget that the Government intended to restrict the opportunities for tax-efficient salary sacrifice. In the event, the Government simply announced that it intended to consider limiting the range of benefits that may be offered through salary sacrifice schemes. Nevertheless, it was confirmed that salary sacrifice for enhanced employer pension contributions, childcare benefits and health-related benefits (such as the cycle to work scheme) would not be affected by the proposals.