Dear Mr Osborne,
As the budget approaches, I would like to ask that you take one small step with a big impact to encourage employee ownership in private companies in the UK.
You probably know, the current capital gains tax regime allows entrepreneurs to reduce their tax on "qualifying lifetime gains" from 28% to 10% for the first £10m of gains in their life. The impact is to reward them by reducing the tax by £1.8m from normal CGT rates and by £4m against higher rate tax rates, if they are lucky enough to make gains of £10m+ in their lifetime. Your increase in the limits was welcomed by entrepreneurs and investors up and down the land.
The relief is a great one, but when it was introduced it had the impact of making matters worse for a number of smaller shareholders and employees. The relief penalises these people with higher rates of tax - either the full CGT rate of 28% or potentially 50% (+NIC) if taxed as employees where the impact of such a gain pushes them into the highest tax rate.
As a little background, prior to Entrepreneurs' Relief, capital gains were subject to Taper Relief.
Under Taper Relief, the limits on gains were different and the result was that an eligible capital gain could reduce the tax rate to an effective 10% rate. However, the qualifying criteria under Taper Relief was different, in particular, in relation to the percentage ownership of shares. The old regime meant that almost any shareholding would qualify for taper relief - as a result shareholders with less than 5% would be eligible for the lower rate, which is now the minimum holding for enjoying Entrepreneurs Relief. Furthermore the qualifying length of ownership, whilst longer, allowed holders of Enterprise Management Incentive (EMI) scheme options to be considered as if they owned the share for the entire period that they from the grant of the option. The new rules mean that qualifying shares must have been owned for at least twelve months and an option is not considered to be ownership.
The consequence is that today, an investor or an employee, in what would otherwise be an eligible investment for the old taper relief, is now penalised under the new regime. An investor must have more than 5% to qualify for entrepreneurs relief and an EMI shareholder must have more than 5% and also must have exercised the shares at least a year in advance of a transaction occurring - and given the fact that most scheme rules only allow for exercise at the point of sale, this seems totally pointless.
It doesn't seem fair, does it? Staff and early stage investors, who do not use EIS, get penalised for investing in risky start-ups - sometimes they will leave highly paid jobs and yet the very thing that the government is trying to encourage (and even has a scheme in place for, the EMI scheme) ends up costing them more.
Let me give you two examples - I was a founding shareholder of, then, a small clinical research technology company - Cmed Group Limited. I put in a very small amount of money, but gave a large amount of my time to get them started - initially myself and the CEO worked from his dining room table. Now Cmed Group, a Horsham company, is a global business and employs over 300 people. But because I own less than 1%, and even though I risked my time for no reward at the beginning - I will be penalised by paying a 28% CGT rate if I sell any shares instead 10%.
On a different side, a company that I act as an adviser for, spent a considerable amount of money with accountants and solicitors putting in place an EMI scheme for a key director. The advisers at the time recommended the scheme as the most beneficial way to reward him as the first employee of the company, whom the founder considers to be her partner in the business. The share scheme awards him 20% of the business at the point of sale. Under the old rules, this would mean that, as he has held the options for a number of years, he would have qualified for taper relief and the 10% tax rate. But now, even though he will own more than 5% at the point of sale - making him eligible on one criteria for Entrepreneurs' Relief - he will fail to get it because, legally, he has only actually owned the share for less than a year - in fact it will be a matter of hours!
Mr Osborne, I am sure you will agree that whilst generous on the one hand, the current arrangements do not go far enough to reward entrepreneurship and risk in a society that wants to encourage a wider ownership of private companies and investment in them.
My proposal would be to do away with both the qualifying length of ownership rules and the qualifying amount of share held - a simple change but one that goes some way to encouraging business in the UK, at a time when we need it most. The cost of this would be minimal at worst and I suspect the impact of the change would actually end up benefiting the Treasury.
I would be very grateful if you would join the campaign and to see it come out of the "Red Box" in March 2012.
As the budget approaches, I would like to ask that you take one small step with a big impact to encourage employee ownership in private companies in the UK.
You probably know, the current capital gains tax regime allows entrepreneurs to reduce their tax on "qualifying lifetime gains" from 28% to 10% for the first £10m of gains in their life. The impact is to reward them by reducing the tax by £1.8m from normal CGT rates and by £4m against higher rate tax rates, if they are lucky enough to make gains of £10m+ in their lifetime. Your increase in the limits was welcomed by entrepreneurs and investors up and down the land.
The relief is a great one, but when it was introduced it had the impact of making matters worse for a number of smaller shareholders and employees. The relief penalises these people with higher rates of tax - either the full CGT rate of 28% or potentially 50% (+NIC) if taxed as employees where the impact of such a gain pushes them into the highest tax rate.
As a little background, prior to Entrepreneurs' Relief, capital gains were subject to Taper Relief.
Under Taper Relief, the limits on gains were different and the result was that an eligible capital gain could reduce the tax rate to an effective 10% rate. However, the qualifying criteria under Taper Relief was different, in particular, in relation to the percentage ownership of shares. The old regime meant that almost any shareholding would qualify for taper relief - as a result shareholders with less than 5% would be eligible for the lower rate, which is now the minimum holding for enjoying Entrepreneurs Relief. Furthermore the qualifying length of ownership, whilst longer, allowed holders of Enterprise Management Incentive (EMI) scheme options to be considered as if they owned the share for the entire period that they from the grant of the option. The new rules mean that qualifying shares must have been owned for at least twelve months and an option is not considered to be ownership.
The consequence is that today, an investor or an employee, in what would otherwise be an eligible investment for the old taper relief, is now penalised under the new regime. An investor must have more than 5% to qualify for entrepreneurs relief and an EMI shareholder must have more than 5% and also must have exercised the shares at least a year in advance of a transaction occurring - and given the fact that most scheme rules only allow for exercise at the point of sale, this seems totally pointless.
It doesn't seem fair, does it? Staff and early stage investors, who do not use EIS, get penalised for investing in risky start-ups - sometimes they will leave highly paid jobs and yet the very thing that the government is trying to encourage (and even has a scheme in place for, the EMI scheme) ends up costing them more.
Let me give you two examples - I was a founding shareholder of, then, a small clinical research technology company - Cmed Group Limited. I put in a very small amount of money, but gave a large amount of my time to get them started - initially myself and the CEO worked from his dining room table. Now Cmed Group, a Horsham company, is a global business and employs over 300 people. But because I own less than 1%, and even though I risked my time for no reward at the beginning - I will be penalised by paying a 28% CGT rate if I sell any shares instead 10%.
On a different side, a company that I act as an adviser for, spent a considerable amount of money with accountants and solicitors putting in place an EMI scheme for a key director. The advisers at the time recommended the scheme as the most beneficial way to reward him as the first employee of the company, whom the founder considers to be her partner in the business. The share scheme awards him 20% of the business at the point of sale. Under the old rules, this would mean that, as he has held the options for a number of years, he would have qualified for taper relief and the 10% tax rate. But now, even though he will own more than 5% at the point of sale - making him eligible on one criteria for Entrepreneurs' Relief - he will fail to get it because, legally, he has only actually owned the share for less than a year - in fact it will be a matter of hours!
Mr Osborne, I am sure you will agree that whilst generous on the one hand, the current arrangements do not go far enough to reward entrepreneurship and risk in a society that wants to encourage a wider ownership of private companies and investment in them.
My proposal would be to do away with both the qualifying length of ownership rules and the qualifying amount of share held - a simple change but one that goes some way to encouraging business in the UK, at a time when we need it most. The cost of this would be minimal at worst and I suspect the impact of the change would actually end up benefiting the Treasury.
I would be very grateful if you would join the campaign and to see it come out of the "Red Box" in March 2012.
