As we enter the run-up to the General Election in May, private equity funds and their managers might want to consider what the possible tax implications of a new Government might be both for the managers of their portfolio companies and for themselves as individuals.
Labour and the Liberal Democrats have both made certain recent statements about their plans for tax policy if they were to be elected and there are two areas in particular where prompt action should be considered:
- Employee shareholder shares (often referred to as "shares for rights") ("ESS").
Both Labour and the Lib Dems appear to be committed to putting an end to the use of ESS (under which employees can be give shares which are tax-free on sale, in return for giving up certain employment rights).
ESS schemes have been very popular during the last 18 months, particularly for managers in private equity-backed companies. The issue for Labour and the Lib Dems is that, (in their view) quite apart from the ESS being a tax give-away, they believe that those now benefiting from the relief are not the types of individual that it was intended for.
Businesses considering issuing ESS shares should therefore think about getting the share issue completed before the General Election or, ideally, before the Budget on 18 March 2015 (since, before the election comes, the electioneering and the Budget may contain some surprises).
Labour intends to increase the top rate of income tax to 50%. Consideration should be given to accelerating payment of cash bonuses (and deferred bonuses) and/or the vesting of share awards for high earners to reduce the income tax and NICs burden.
It is also worth noting that the Lib Dems have in the past indicated that they would narrow the scope of entrepreneurs' relief by increasing the shareholding requirement to 25%. Whilst that seems a bridge too far - not least because it would require the backing of a larger party in a new coalition - it is possible that a new government may try and restrict entrepreneurs' relief to situations where shareholders are entitled to 5% of the economic rights of a company (or group), rather than simply owning 5% of the issued share capital. This is something to keep under review following the election.