Company employees lose out in capital gains tax changes

Yorkshire Building Society, one of the biggest providers of employee Sharesave Schemes, has today called for the Chancellor to look in more detail at the implications of the new Capital Gains Tax (CGT) announced in Tuesday’s Pre-budget statement, and its effect on employee share plans.

Whilst the Society in principle supports the simplification of the new flat rate CGT, it believes that an unintentional consequence of this move is to penalise hundreds of thousands of workers who have been saving to acquire shares in their employer’s company, for example through Sharesave Schemes.

Currently individuals who retain shares from Sharesave Schemes for two or more years benefit from tapered CGT which requires basic rate taxpayers to pay only 5% CGT, increasing to 10% for higher rate taxpayers. From April 2008 a flat 18% CGT will be applied at anytime to gains above the threshold of £9,200 (a worked example is shown overleaf). This change, which sounds like a pleasing simplification, has a number of impacts:

Encourages those who are currently holding shares from former Sharesave Schemes to sell before April 2008 to take advantage of the lower tax rate they benefit from under the current system

Provides no incentive for employees in Sharesave Schemes, which mature after the new tax year, to retain their shares

Encourages employees to sell their shares immediately, as they will no longer be subjected to CGT at their rate of income tax (22% for lower rate tax payers and 40% higher rate tax payers).

Given the relaxing of tapering is welcomed, one option the Chancellor could consider is to create a separate dedicated ISA allowance, where employee share plan maturities could be invested. This move would support the Government’s oft-stated commitment to longer-term savings and wider share ownership.

Jill Evans, Yorkshire’s Head of Corporate Share Plan Services said “Whilst we appreciate the Chancellor’s desire to simplify the CGT regime, an urgent review of how this affects employee share plans is needed. These are not the company ‘fat cats’, but members of the general workforce who have made a conscious decision to save and invest in the future of the company they work for. It is also unfortunate that the tax will be applied to all existing Schemes and not restricted to those commencing in April 2008 – so for many the rules of their Scheme have been changed mid-term.”