Capital Gains Tax and Employee Share Ownership

Changes to Capital Gains Tax (CGT), confirmed by the Treasury last week, could negatively affect over 270,000 Save As You Earn (SAYE) employee shareholders – 16% of the 1.7 million employees participating in SAYE schemes – according to ifs ProShare, the not-for-profit organisation that supports employee share ownership in the UK.

The current CGT regime means that basic rate taxpayers who have held shares in their employer for at least 2 years are only subject to a 5% CGT charge. The Chancellor’s changes, confirmed today, mean that these employee shareholders will have to pay an additional 13% tax on any gain above £9,200 from April 2008.

This means employees who have contributed to the success of their employers are now going to be worse off than under existing legislation whilst non-employee shareholders who have not done so are to have their CGT liabilities substantially reduced (from 40% to 18%). The changes are also likely to have some impact on medium and long term saving through employee share ownership, damaging moves towards wider share ownership as a means of saving for the future.

Fiona Downes, Head of Employee Share Ownership at ifs ProShare, said:

“Having informed the Chancellor of the fact more than 270,000 employees could be worse off following his proposals, we are naturally disappointed that this evidence appears to have been ignored.

As well as there being no changes to mitigate the effects on employee shareholders, the uncertainty and repeated delays in confirming this decision mean many employee shareholders will have to make relatively quick decisions about whether or not to sell or hold some of their shares. SAYE participants should speak to their employer about the range of choices available to them or seek financial advice.

Employers will also face a real challenge in communicating these implications to their employees within a very short period of time.

In view of these incredibly tight time constraints a grandfathering arrangement should be introduced so that existing participants in SAYE schemes continue to benefit from taper relief at the current rates."