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March 2010 Budget: review of tax treatment of growth shares, JSOPs, carried interest and similar arrangements
Practical Law UK Legal Update 5-501-8337 (Approx. 3 pages)
March 2010 Budget: review of tax treatment of growth shares, JSOPs, carried interest and similar arrangements
by PLC Share Schemes & Incentives
| Published on 24 Mar 2010 • United Kingdom |
A legal update about a planned review of the tax treatment of "geared growth" arrangements which secure lower CGT, rather than income tax, liabilities for employees' gains from interests in shares and other securities.
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The March 2010 Budget included an announcement by HM Treasury that there would be "consultation in summer 2010 on taxing ... returns from geared growth, following the increased use of tax-motivated arrangements involving employment-related securities" . . . "to ensure that income from employment is taxed correctly".
This appears to refer to arrangements such as growth share plans and shared growth/joint ownership and carried interest arrangements, which are intended to secure that employees pay capital gains tax (at 18%) rather than income tax (at 40 or 50%) on gains on shares (and other securities) or interests in them. There has been increased interest in these arrangements in anticipation of the increase in the highest rate of income tax on 6 April 2010. Any changes to their tax treatment may not include concessions for securities and interests already acquired by employees. The consultation and the threat of changed tax treatment will be of interest to employers and advisers who use "geared growth" arrangements. (See March 2010 Budget - Chapter 5, Budget Report - paragraph 5.63 and PN03 - Protecting tax revenues: Employment-related securities and geared growth (at page 39).)
The March 2010 Budget included an announcement by HM Treasury that there would be "consultation in summer 2010 on taxing ... returns from geared growth, following the increased use of tax-motivated arrangements involving employment-related securities" . . . "to ensure that income from employment is taxed correctly". References to "geared growth" are explained in another budget document (see Legal update, March 2010 Budget: no more CSOP options over shares in subsidiaries of listed companies) which indicates that "geared growth" includes arrangements such as:
- Growth shares (see Practice note, Growth shares and hurdle shares).
- Shared growth/joint ownership arrangements (see Practice note, Joint ownership arrangements: an overview).
- Carried interest arrangements in private equity transactions (see Practice note, Management interests in private equity and venture capital: BVCA/HMRC memorandum on carried interest).
These allow employees to acquire securities, or interests in them, at relatively low cost (and/or with relatively low tax bills) and then pay capital gains tax (CGT) (currently at 18%) on any gains, rather than income tax (potentially at 40% or, from 6 April 2010, at 50%, together with NICs liabilities). Employers and high earners have understandably shown increased interest in these types of arrangement in anticipation of the 50% income tax rate for high earners which comes into effect on 6 April 2010 (see Practice note, Tax changes for higher earners).
HM Treasury have so far provided little information about the proposed review. It is possible that any changes may not include grandfathering provisions for securities and interests already acquired, as there is a long history of anti-avoidance activity in this area (for a discussion, see Practice note, Growth shares and hurdle shares). The government has previously warned that anti-avoidance measures in respect of employment-related securities may be retrospective (Paymaster General's statement on Finance Bill 2005 measures regarding anti-avoidance legislation in relation to employment taxes). On the other hand, HMRC has been well aware of these types of arrangement for a long time, and until now appeared to show a degree of acceptance of them, especially carried interest structures. However, the changed tax and economic environment and likelihood of their increased usage has probably undermined this tolerance. Companies and advisers should have been aware of the risk that a change in legislation, or even a change in the CGT rate, at any time during the period of employee ownership could undermine the tax-efficiencies of these arrangements.