The much anticipated changes to the capital gains tax regime were finally revealed. For disposals of assets on and after 23 June 2010:

• The rate of CGT remains at 18% where an individual’s aggregate income and taxable gains are less than the upper limit of the income tax basic rate band (currently £37,400, but this will be reduced with effect from 6 April 2011)
• The rate of CGT will be 28% for gains (or parts of gains) which, when aggregated with an individual’s income, exceed the upper limit of the basic rate band
• The effective rate for disposals which qualify for entrepreneurs’ relief remains at 10%, but the limit on qualifying lifetime gains is increased from £2m to £5m

The annual individual exemption remains at £10,100 – only gains in excess of this amount in any tax year are subject to CGT.

Our view
The simplicity of these new rules is welcome – there is no need to determine whether assets are business or non business assets or any need to apply tapering or any index linked reliefs. However, of greater importance to companies operating share incentive plans is the fact that there are still considerable tax advantages for executives and employees who participate in these arrangements:

• The continued existence of the annual exemption (which many feared would be abolished) means that employees participating in HMRC approved savings-related share option plans and share incentive plans will still be able to realise gains of up to £10,100 without paying any CGT at all on them
• The ability for employees to pay CGT at 18% or 28% on gains made on the disposal of shares in their employer company is still hugely attractive compared to paying income tax and national insurance contributions on cash incentives. Higher rate taxpayers will pay income tax at 50% on cash payments plus 1% uncapped employees’ national insurance contributions, increasing to 2% with effect from April 2011.
• In addition to being able to operate equity incentive plans as tax-efficient tools for retaining and incentivising employees (especially at a time when cash resources may be limited), employers operating equity incentive arrangements will also benefit from the savings in employers’ NICs (currently payable at 12.8%, increasing to 13.8% in April 2011) which are payable on cash-based incentives

For more information on these issues please contact

Victoria Goode or Sara Cohen

or your usual Lewis Silkin contact