Impact of CGT rate increases on employee share incentives

Michael Deeks, Tax Partner, Olswang

As Natasha says, the Chancellor has elected to “keep it simple” by raising the CGT rate for high earners from 18% to 28%, effective from midnight tonight.  Taking into account the proposed increases in National Insurance contributions (NICs) rates from April 2011, the effective rate of income tax and NICs payable on unapproved share plans (where employer NICs is passed on to employees) will exceed the new higher rate of CGT by up to 30.9%.  Structuring employee share incentives to take advantage of HMRC approved plans and other arrangements which are taxed as capital rather than income still looks well worthwhile.

The 18% CGT rate is retained for basic rate taxpayers which is likely to increase the number of employee share plan participants who transfer shares to their spouse/civil partner where this would result in a CGT saving.  However, it should be noted that individuals must add their capital gains (after deducting applicable reliefs and losses) to their taxable income in order to determine the applicable rate of CGT.  So individuals may pay CGT at both 18% and 28%.

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