Capital gains tax proposals will not affect most employee shareholders, says Mercer

Mike Landon, principal at Mercer, commented: "The reality is that most employee shareholders will not be affected by the proposed changes, and some will actually be better off."

Under current capital gains tax (CGT) rules, employees who sell shares in their employing company can claim the business assets rate of taper relief. This means they pay CGT on only 25 percent of their capital gain if they have held the shares for at least two years. In effect, higher rate taxpayers therefore pay CGT of 10 percent and basic rate taxpayers pay 5 percent. The proposed changes in the Pre-Budget Report include a new uniform CGT rate of 18 percent and the withdrawal of taper relief from 6 April 2008.

Landon commented: "In some circumstances, there will be a large increase in the capital gains tax bill. However, most employee shareholders currently do not pay any capital gains tax at all when they sell their shares. The capital gain they make is usually covered by the annual capital gain tax exemption, which is £9,200 for the 2007-08 tax year. This exemption is not affected by the proposed changes.

"Even those employees who do make capital gains from SAYE plans which exceed the annual exemption quite frequently sell the shares immediately after they have acquired them. So they do not qualify for taper relief in any case. From next April, these employees will be paying CGT at 18 percent, instead of the 40 percent currently paid by a higher rate taxpayer, and the 20 percent paid by a basic rate taxpayer. They will be better off under the new rules."

Landon continued: "The tax-advantaged employee share plans - such as SAYE plans, share incentive plans (SIPs), company share option plans (CSOPs) and enterprise management incentives (EMI) - will continue to be more attractive than unapproved share plans. They will allow employees to benefit from owning shares in their employing companies either completely free of tax or paying a capital gains tax rate of 18 percent, rather than having to pay income tax and national insurance contributions on the value of their shares."