Pre-Budget report: New capital gains tax rate could increase sharesave tax

The increase in capital gains tax (CGT) to a flat rate of 18% in April 2008, has been welcomed by employee share experts, even though it could result in higher rates for some employees in sharesave plans.

Currently, individuals who have been shareholders in company sharesave schemes for more than two years could be paying a CGT of just 10%. The new rate of 18% will apply to all employees, which means that higher-rate tax payers participating in a sharesave scheme could potentially by 8% worse off than before, while basic-rate tax payers could be 13% worse off.

Fiona Downes, head of employee share ownership, said: “Whilst the Treasury might have sound reasons for simplifying CGT, it would appear the consequences for employees saving through employee share plans had not been fully assessed. These apparently unintended consequences contradict [the] Government’s oft-stated commitment to encouraging long-term saving and to their support for wider share ownership.”

However, according to Stella Brookes, director at consultancy Inbucon, some UK employees in share schemes will benefit. “Unless employees were going to hold shares for more than two years this will be a better deal,” she said.

The flat rate will also be simpler for employers to explain to staff as they will not have to negotiate communications around tax relief related to the length of time shares are owned. “On balance, 18% is easier for employers to communicate to staff. There is no need to explain the tax relief issues around how long you have had the shares,” said Brookes.

Employees that participate in a share incentive plan (SIP) are protected from capital gains tax, and so will not be affected by the new arrangements.