Inland Revenue 2
8 November 2000
TAX BOOST TO EMPLOYEE SHARE OWNERSHIP
New measures to encourage more employees to take a stake in their company were announced by the Chancellor today.
The three measures, which will boost productivity by increasing employee commitment to growth in the enterprises where they work, will:
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help more employees benefit from the generous business assets rate of taper relief from capital gains tax when they sell their shares. Business assets taper relief is, subject to consultation, to be made available from April 2000 to employees of a range of non-trading companies, alongside employees of trading companies who are already eligible;.
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expand the Enterprise Management Incentives so that smaller businesses can make more flexible use of the benefits in a way best suited to their needs, to help recruit and retain a wider range of staff they need to help grow the company; and
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address the uncertainty regarding unpredictable National Insurance liabilities on the growth in value of some employee share options that were granted to employees between 6 April 1999 and 19 May 2000. Legislation will be brought forward to allow companies to settle these liabilities rather than having them continue to accrue.
DETAILS
Capital gains tax taper relief
1. The measure will simplify the tax system and reduce compliance costs. Employee shareholders will no longer always have to consider whether the company where they work is trading. As a result, many companies, in particular listed companies, will no longer have to address this question on behalf of their employees.
2. Employees, including part-time employees, of the company in which they hold shares (or of any company in the group) will qualify. Officers of a company are at present treated in the same way as employees and this will continue.
3. The new definition of business assets will apply to disposals on or after 6 April 2000, and to periods of ownership from 6 April 2000, thus coinciding with the changes announced in Budget 2000. Where shares qualify as business assets only from that date, an apportionment of the eventual gain will be necessary so that part qualifies for business asset taper and the balance for non-business asset taper. The apportionment will be carried out under existing rules.
4. The introduction of the new measure will be subject to suitable revenue protection. Rules will be needed to prevent people obtaining an unfair tax advantage by securitising their personal assets in companies of which they are directors or employees. One option would be to continue to require close companies to be trading if shares in them are to qualify as business assets. The Inland Revenue will consult on the rules to set in place to achieve this protection.
5. Comments on the proposal generally, the rules to prevent exploitation and the extent of the compliance cost savings will be welcome and should be sent by 13 December 2000 to:
6. Further details are likely to be announced in the Budget 2001. Subject to the outcome of consultation, the Government intends to include the measure in the Finance Bill 2001.
Enterprise Management Incentives
7. At present, 15 key employees can each be granted options over shares worth up to £100,000. So companies are allowed to grant EMI options over a maximum of £1.5 million of their shares at any one time.
8. Many of the smaller higher risk companies that can use EMI have said that the limit of 15 employees is not flexible enough for their type of business, because share options are important to attract larger numbers of highly skilled workers. The Government is keen for these smaller enterprises to be able to use EMI in the way that will best meet their business needs.
9. The Government will, subject to consultation,abolish the limit on the number of employees and replace it with a limit on the total value of shares under EMI option which would be raised from its current £1.5 million to £2.5 million per company. This will help eligible smaller higher risk companies to recruit the staff they need to help them achieve their growth potential.
10.The Inland Revenue will consult on what exact changes are needed to achieve the Government's objectives. Comments on the proposed changes are welcome and should be sent by 13 December to:
Richard Lambert
Inland Revenue
Capital and Savings
Room 138
New Wing
Somerset House
Strand
London WC2R 1LB
Email Richard Lambert
11. Further details are likely to be announced in the Budget 2001. Subject to the outcome of consultation, the Government intends to include the measure in the next Finance Bill.
National Insurance on Share Options
12. National Insurance Contributions are charged on gains arising when share options are exercised outside an Inland Revenue approved scheme if the shares are readily convertible into cash. While employers can plan for NICs on regular pay, it is not as easy for them to plan for NICs on share options, particularly where the share price is volatile.
13. Legislation was introduced this summer to allow employees to agree that they will pay the employer's NIC when they make a gain on their share options. However, some companies have said that they cannot make such agreements with their employees if an option has already been awarded.
14.To help companies that granted options after 6 April 1999 legislation will be introduced at the earliest opportunity to limit the amount of the NIC payable on options granted between 6 April 1999 and 19 May 2000. The liability will be limited to the gain attributable to the growth in company share price up to 7 November 2000.
NOTES FOR EDITORS
Capital gains tax taper relief
15. Capital Gains Tax (CGT) taper relief was introduced in the Finance Act 1998. The relief reduces the amount of a capital gain that is charged to tax on the disposal of an asset; the reduction increases the longer the asset has been held after 5 April 1998. Taper relief applies to the capital gains of individuals, trusts and the personal representatives of deceased persons, but not to the capital gains of companies.
16.Different tapers apply to business assets and non-business assets. The taper reduces the effective CGT rates for a higher rate CGT payer from 40 per cent for business assets and from 40 per cent to 24 per cent for non-business assets.
17.The Finance Act 2000 broadened the range of assets that qualify as business assets with effect from 6 April 2000. Business assets now include:
- shares owned by employees and officers in a trading company where they work;
- shares in unlisted trading companies; and
- shares in listed trading companies provided that the individual controls not less than 5 per cent of the voting rights.
18. Most businesses are treated as trading, but investment companies and property investment companies are not. Companies that are mainly trading, but that have more than an insubstantial amount of non-trading activities are also not treated as trading.
19. There will be no change to the requirement for shares held by non-employee shareholders to be in trading companies in order to qualify as business assets.
20. Taxpayers will benefit from the relief on disposals of assets when they calculate their CGT liability under self-assessment. The April 2001 Helpsheet IR 279 Taper Relief will include information about the proposals, and a revised version will be issued after the next Finance Bill has received Royal Assent. These helpsheets will be available on the Inland Revenue's website (see below) and from the Orderline on 0845 9000 404.
21. Close companies are defined in legislation. Close companies include companies that are controlled by five or fewer people.
Enterprise Management Incentives
22. Enterprise Management Incentives were introduced in Finance Act 2000 after a successful period of consultation. The incentives are proving to be popular. The Inland Revenue has been notified that more than 100 companies have awarded EMI options to over 530 employees up to the end of October.
23. EMI share options can be granted by trading companies with gross assets of no more than £15m. This size limit is the same as used for other tax incentives aimed at encouraging equity investment in small, higher-risk unquoted trading companies; the Enterprise Investment Scheme, Venture Capital Trusts, and the Corporate Venturing Scheme.
24. Currently under EMI, companies can grant up to £100,000 worth of share options to each of 15 key employees effectively limiting the total value to £1.5 million per company. The options are normally free of Income Tax and National Insurance charges. When the shares are sold, capital gains tax taper relief normally starts from the date the options were granted.
National Insurance Contributions
25. Since 6 April 1999 National Insurance has been payable by both employer and employee on the gains arising when share options are exercised outside an Inland Revenue approved scheme and where the shares are readily convertible into cash.
26. Companies with very volatile share prices expressed concern that their exposure to an unpredictable NICs liability on unapproved share options could endanger their investment strategies and damage their future growth by deterring investors. Legislation was introduced on 28 July in the Child Support, Pensions and Social Security Act 2000 to allow the employee to bear the employer's NIC on share option gains, and changes in Finance Act 2000 gave employees tax relief for any of the employer's NICs that they paid against the taxable gain on the share option.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 020 7438 6692/6706/7327
(Out of hours: 07860 359544)
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(Office hours only)
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