272,000 employee shareholders could face increased CGT bill

ifs ProShare, the not-for-profit organisation that supports employee share ownership, today met with Treasury officials to express the views of the employee share plans industry, to provide evidence of the negative impact that capital gains tax (CGT) changes may have on many hardworking employees and to discuss possible solutions.

Approximately 1.7 million employees in the UK are making monthly savings through a Save As You Earn (SAYE) scheme, approximately 16% of which are likely to be worse off after the Chancellor’s decision to change CGT.

The changes announced by the Chancellor last month mean that employee shareholders could now be subject to an 18% CGT charge from April 2008, regardless of how long they have held shares in their employer.

Previously, basic rate taxpayers who held their shares for at least 2 years would have been subject to 5% CGT (the change means such shareholders will now be 13% worse off) and higher rate taxpayers who held their shares for at least 2 years would have been subject to 10% CGT (the change means such shareholders will now be 8% worse off.)

So, 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%).

Fiona Downes, Head of Employee Share Ownership at ifs ProShare said, “When the Chancellor first announced these changes, we made it clear that a significant minority of SAYE participants would be affected. Our research supports this initial assumption, as 80,000 employees a year could now face an increased tax bill. If the Government wishes to continue encouraging medium and long term saving through employee share ownership then action is needed to address this issue.”

As a result of feedback from some of the UK’s largest employers, ifs ProShare put forward a range of possible solutions for the Treasury to consider. These included: a complete exemption from CGT for shares acquired through SAYE schemes; the maintenance of taper relief for shares acquired through SAYE schemes and a range of other possible solutions, such as removing the ISA limit for shares transferred from SAYE schemes.

Fiona Downes added, “In the interests of meeting the Government’s objective of simplifying the tax system, we believe the simplest and most effective solution would be a complete exemption for SAYE Schemes. This would send out a very clear message that the Government is serious about encouraging medium and long term saving through employee share ownership.”