It is possible this increase will be to a rate as high as 40% or even 50% on the disposal of many assets. While it is easy to assume that it is a tax that only the wealthiest would pay, any CGT changes could also have a major impact on ordinary employees who acquire shares via their employer.
Over the years successive governments have encouraged employee share ownership, with the availability of HM Revenue & Customs (HMRC) approved share option and share incentive plans. The approved plans allow the employee to take the profits on any increase in value of shares as a capital gain rather than be taxed as additional employment income. Due to the generous annual exemption available for individuals of £10,100, it means that many employees selling modest amounts of shares each year would have little or no CGT to pay on the profits arising from the sale of shares in their employer company. These would otherwise have been subject in full to the higher rates of income tax and National Insurance Contributions.
If, as speculated, there is a significant cut in the CGT annual exemption, (currently £10,100), it will be a big blow for regular employees if CGT is also increased to match income tax rates (of 40% or 50%). This is particularly the case for those employees who have been encouraged to accumulate holdings of shares in their employer company over the years, perhaps with the view of supplementing their retirement provision.
It is widely recognised that employers who offer shares as part of the reward package are more likely to have an increased sense of loyalty and motivation in their workforce. This will be ever more valuable for UK businesses as we leave the recession.
Many of the largest employers offer employee share plans - not just for the high earners in the banking sector. There are a number of larger employers with lower-paid staff with HMRC approved Share Incentive Plans (SIP) and Save As You Earn Share Option Plans (SAYE). The HMRC regulations for both the SIP and the SAYE require that participation has to be offered to all employees on similar terms and participation is limited in terms of the value of shares that are available to be awarded to employees each year. As a consequence there is little room for abuse.
By way of example, it has been widely reported that Tesco staff enjoyed on average £12,000 worth of shares following a five-year SAYE plan when it matured in 2007 and a further £5,600 last year. The SIP and SAYE are designed to reward loyalty over the longer term (three to five years) and provide lower earners with the opportunity to accumulate levels of share ownership that would not have otherwise been available to them.
A reduction in the CGT annual exemption would have the greatest impact on those lower- paid workers who are most likely to have to pay CGT for the first time. In the past many of the lower-paid employees would have been able to sell shares in their employer company within the annual exemption and have not been required to pay any CGT at all. If the exemption were to be reduced, coupled with an increase in the CGT rate, it will have a significant impact on the five million or so workers who participate in employer provided share plans.
We now see that industry representatives, such as the Confederation of British Industry (CBI), are applying pressure on the new Government to allow long-term investments and special business assets at a lower rate in order to encourage savings, investment and enterprise. Let's hope that the Government recognises the importance of employee share plans and the benefit to this important group of workers by extending the CGT relief available to entrepreneurs on their business assets to include shares held by employees in the employer company.
Kiki Stannard is head of reward consulting at Vantis
