The government has finally published draft legislation demonstrating how the changes to the UK’s capital gains tax (”CGT”) regime will be implemented. In this note, we focus on employees who hold (or have exercised) share options over shares in their employer.

Previously, “taper relief” applied to certain business assets, which included the majority of shares acquired by exercising employee share options. This meant that when shares acquired were eventually sold, the gain would be tapered down depending on how long the shares had been held by the employee. After two years of share ownership, in most cases, CGT was due on only one quarter of the gain (or, as it was more commonly formulated, the CGT liability was tapered down to an effective 10% rate of tax).

For holders of EMI share options the outlook was even better as the period from when taper relief started to accrue was the date of grant of that option, not the date of exercise of the option. This taper relief was a major concession in favour of EMI option regime and its abolition is also the major blow to the share scheme industry of the 2008 Budget.

The government has confirmed in its draft legislation that taper relief as described above is to be abolished from 6 April 2008 which will work against most EMI optionholders and, potentially, many other employees who exercised share options more than one year ago and who cannot sell the shares pre-6 April 2008.

Nothing needs to (or can) be done in practice regarding exercise of options (unless you have an EMI option and can exercise the option now and sell the shares before 6 April 2008!).

The good news is, of course, that the headline rate of CGT is being reduced to a flat rate of 18%, down from 40%. In addition, the government is introducing an “entrepreneur’s relief” which operates like a one-off super-exemption from CGT on gains of up to £1m per individual. Sadly, however, its availability is seriously restricted and it is thought that few employee share option holders will benefit from this concession in the long run because most share options are over a small percentage of shares and only disposals of more than 5% of a company’s shares are within the new relief.

Posted: March 5th, 2008 under Corporate Finance.
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