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Disguised Remuneration – Updated Hmrc Guidance And Its Effect On Employee Share Schemes
HMRC guidance in relation to family companies, termination payments and share hedging by trusts, and how these may affect employee share ownership arrangements.
• Family companies
The impact of the disguised remuneration legislation (Part 7A ITEPA 2003) on succession planning in family companies has been an issue since the legislation was first proposed. Shares in a family company are often passed to younger members of the family by way of gift or at an undervalue as part of an estate planning strategy where the recipients are also employees of the company. Anyone thinking of doing so will not want the recipients to be subject to income tax and NIC.
There is an exclusion from a charge under the employment related securities legislation (Part 7 ITEPA 2003), where shares are acquired “in the normal course of the domestic, family or personal relationships”
The latest HMRC guidance gives an example of where employees who are family members receive shares from a family trust. HMRC states that making such distributions for reasons of estate planning would not, of itself, bring the arrangement within the ambit of Part 7A. If, however, remuneration planning is involved, the arrangement will be within Part 7A. The relevant determining factors will include such matters as
• Why did the transferor decide to transfer shares?
• How did the transferor determine the allocations between recipients?
• What has been the remuneration policy of the company towards the recipients?
• Is there a connection between remuneration policy and the transfer of shares?
This guidance is potentially a helpful first step towards gaining a clearer understanding of how Part 7A might have an impact on estate planning, but that is all it is: a first step.
• Termination payments
HMRC refers to an example where an employee benefit trust (EBT) makes a termination payment to an employee who has been made redundant. HMRC confirms that, if the payment falls wholly within the provisions of ITEPA 2003 which deal with termination payments (that is, there is no ancillary element having the character of rewards or recognition in connection with employment), the payment will fall outside the ambit of Part 7A. This will be advantageous since tax relief might be available for the first £30,000 of any such termination payment.
• Options used as hedging mechanism to satisfy share awards
In its previous guidance, HMRC confirmed that where an EBT trustee hedged its liability to satisfy share awards by acquiring a general pool of shares, there would be no “earmarking”
In its latest guidance, HMRC extends this principle to a situation where the EBT trustee hedges its liability to satisfy share awards by buying a call option.
Part 7A continues to be a complex area to be navigated by taxpayers and their advisers. Although this latest guidance is to be welcomed, and is of some value where it potentially impacts on employee share schemes, its application is limited and each case still needs to be considered on its own facts.
News release ends, 10 May 2012.
As a specialist firm of UK solicitors focusing principally on employee ownership and share schemes we will help you create a share plan tailored to the particular needs of your business. Find out more at http://www.postlethwaiteco.com
Note for Editors:
POSTLETHWAITE is a law firm which provides specialist advice on employee share schemes, employee share ownership and majority employee ownership, including EMI share options, approved options, long term incentive plans, Share Incentive Plans (SIPs), ownership by employee trusts and a wide variety of other share schemes. We look after clients from all parts of the UK, with a particular focus on smaller listed and private companies.
For further information concerning employee ownership and employee share incentives, please contact Robert Postlethwaite on 020 7470 8805 11-15 Betterton Street London WC2H 9BP
Authorised and regulated by the Solicitors Regulation Authority, number 385417