10th May 2012
Following our earlier news item commenting on the disguised remuneration legislation, this news item looks at the latest HMRC guidance in relation to family companies, termination payments and share hedging by trusts.
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” of the acquirer. This is frequently helpful in taking an acquisition of shares in such circumstances outside the ambit of Part 7. There is, however, no equivalent exclusion from the impact of Part 7A, so that there remains a risk of “earmarking” of shares which could trigger a PAYE income tax and NIC liability at the time of the transfer.
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.
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” for the purposes of Part 7A if the EBT trustee is unaware of the particular allocation of shares between particular employees. 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, its application is limited and each case still needs to be considered on its own facts
If you or your clients would like to discuss the impact of these provisions please contact:
Robert Postlethwaite email@example.com
David Reuben firstname.lastname@example.org
Stephen Chater email@example.com
Judith Harris firstname.lastname@example.org