The Government has recently announced prospective changes to the capital gains tax (”CGT”) regime which are intended to take effect from 6 April 2008.

The headline CGT rate is to be fixed at 18% on any chargeable gain made on the disposal of assets from 6 April 2008. This is to be welcomed in the context of the “usual” 40% rate, but will not work in everyone’s favour, particularly as the changes also include the abolition of “taper relief”.

Currently, entrepreneurs can benefit from “taper relief” – this reduces the effective rate of CGT by as much as three quarters (i.e. potentially a CGT charge at 10% rather than 40%) depending on the type of asset held and the period of ownership prior to disposal. This relief also applies to employees who hold options over shares in their employer, and such persons could otherwise benefit from the maximum taper relief as early as the second anniversary of the date of grant (in the case of an EMI option). Abolishing taper relief means that employees could face a CGT liability of 18% on any gains made on the disposal of shares acquired under certain share option schemes, rather than a potential 10% liability.

Following representations in the press and from the finance community (particularly from private equity funds), the Chancellor announced concessions for entrepreneurs by allowing the first £1million of capital gains to still be taxed at an effective 10% rate provided certain criteria were met. Sadly, the concession does not extend to employees holding share options, who appear to have been overlooked and the proposed changes could therefore impact unfavourably on them. Whilst it is not expected that this will stop employees exercising share options as a result of the proposed changes (and there are still substantial income tax advantages to be gleaned), there is clearly some ground for disquiet particularly because the concessions offered by the Chancellor do not apply to those whose gains are, on balance, likely to be towards the more modest end of the scale.

Draft legislation to make the changes to the CGT regime has not yet been published and the final details are eagerly awaited.

Posted: January 29th, 2008 under Corporate Finance.
Comments: none