8/3/2019 Pett - Mitigating the 50% Tax Rate
1/89
8/3/2019 Pett - Mitigating the 50% Tax Rate
2/89
Part A: Disguised Remuneration basic dos and donts pitfalls to avoid examples
Part B: EBTs where are we now? HMRC settlement opportunity
Part C: Planning against future withdrawal of 50% rate income tax on share awards: now or later ? forfeitable shares vs. nil-cost options vs. conditional share awards
Part D: Planning ideas for delivering future growth using approved plans SIPs v EMIs using JSOPs restricted growth shares post Grays Timber
deferred payment for newly-issued shares contracts for differences non employment-based ideas generous reliefs for owner-managed companies using SIPs
Part E: Other points of interest
1
8/3/2019 Pett - Mitigating the 50% Tax Rate
3/89
Part A: Disguised Remuneration
2
8/3/2019 Pett - Mitigating the 50% Tax Rate
4/89
Step4How is thechargecalculated?
ss554Z2-554Z3
Step1Is there anarrangementre rewardsrecognition orloans relatingto an
employment?s554A
Step2Is there arelevant steptaken by arelevant thirdperson?
ss554B-E
3
Step3Is the relevantstepexcluded?
ss554E-W
Step5Is the amountchargedreduced?
ss554Z4-554Z14
8/3/2019 Pett - Mitigating the 50% Tax Rate
5/89
Is there an arrangement for reward or recognition(or loan)?
Very broadly drafted and, for all practical purposes, if there
is (or was, or is to be) an employment and the arrangementrelates to it, then the new rules apply if a relevant step is
taken in pursuance of the arrangement, or there is aconnection between them
If there is any doubt if such an arrangement exists ... itprobably does!
4
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
6/89
Earmarking or quasiearmarking
s554B
Payment, loan or transferof money or assets554C
5
Making an assetavailables554D
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
7/89
earmarking with a view to a later relevant step being
taken in relation to that money or asset (or money or
assets derived from it)
or
if a sum or asset starts being held specifically with a
view to a later relevant step being taken in relation to it
(or money or assets derived from it)
6
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
8/89
EIM 45110 suggests it has to be for named employee(s)
What if EBT holds unallocated pool of shares against anobligation to satisfy existing or future awards and when
called upon to do so?
What if employer earmarks, but EBT holds shares
without knowing of such earmarking?
What if employee knows nothing?
Avoid supplying names and numbers to trustee in
advance of transfers in satisfaction of awards/options?
7
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
9/89
Making of a payment or a loan
Transfer of an asset (e.g. shares, car, horse or yacht) Grant of option over, or interest in, any shares or securities
Must be to, or at the discretion or request of, the employeeor any person linked with the employee
Includes any form of loan or giving of security for a loan
8
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
10/89
Loans to enable exercise of an employment-relatedshare option, but only if: exercise gives rise to an income tax charge:
used only to pay exercise price, not tax on exercise (so no use ifnil-cost option!)
actually repaid within 40 days
Note:
loans must be to pay exercise price, not tax on exercise !
beware loans to be repaid on sale of shares in an illiquid market
need to review cashless exercise procedures
9
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
11/89
Any person other than (i) the employee (A) or employer (B) or (ii)absent tax avoidance, any member of the same group as theemployer
But, also the employee if acting as trustee, or B, if acting as trustee
group means 51% group (per TCGA 1992)
If B is an LLP, B includes an wholly-owned subsidiary of the LLP
BUT: employer is normally the subsidiary, not the LLP !
does this mean 100% subsid of LLP is a member of the 51% group ? example: Mr A (a member of LLP) is employed by subsidiary of LLP and awarded
shares: in corporate member
in another subsidiary of LLP
10
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
12/89
If, for example, and subject to exclusions, an EBT (or other 3rdperson):
makes a loan
begins to hold cash or assets for an identified employee
offers shares grants share options
agrees, or is intending, to satisfy options granted by the company
makes, or will hold, bonus monies or shares
AllDR charges are subject to PAYE
NICs due on charges arising on and after 6 December 2011:
except anti-forestalling charges arising on 6 April 2012 re step taken9 December 2010 5 April 2011
11
8/3/2019 Pett - Mitigating the 50% Tax Rate
13/89
If, for example, the employer company(or another member ofthe same 51% group):
issues new shares to employees/directors
earmarks cash or treasury shares to satisfy awards to
employees grants options to subscribe for new shares
makes loans to employees (or directors)
If an EBT simply holds a pool of unallocated sharespending vesting of share awards/options, of which thetrustee does not know names of award/optionholders
12
8/3/2019 Pett - Mitigating the 50% Tax Rate
14/89
Grant of employment-related securities option is excluded
But treated as distinct from earmarking
So, what if an EBT (or individual shareholder) earmarks shares tosatisfy an option?
Amount on which Part 7A charge arises is reduced by exercise price if: option shares are relevant shares the option is granted under Bs employee share scheme the number of earmarked shares does not exceed the maximum number
reasonably expected to be needed to satisfy the option there is no connection with a tax avoidance arrangement
(s554Z7)
Charge on exercise (under Chapter 5, Pt 7) but if neither a MV option,nor excluded (per s554L or M), then immediate Part 7A charge on valueof earmarked shares less exercise price !
Amount on which Pt 7A earmarking charge arises is a deductibleamount on Pt 7 charge on exercise (s480(5)(d))
13
8/3/2019 Pett - Mitigating the 50% Tax Rate
15/89
Part 7A charge on earmarking assume terms not excluded by s554L or M
Charge on exercise under Part 7 relief by way of deduction of amount charged on earmarking
transfer of shares on exercise excluded from Part 7A charge (s554N(5)(a))
No relief from initial Part 7A charge as: 554Z5 not applicable would only reduce value of later step for Part 7A
purposes
554Z6 not applicable charge on later step not a general earnings charge
554Z13 - no just and reasonable relief as charge on exercise is under
Chapter 5, Part 7 554Z14 no relief as the later event is itself a relevant step
Effect is to accelerate time of charge, and impose NICs even if
shares are not RCAs
14
8/3/2019 Pett - Mitigating the 50% Tax Rate
16/89
A relevant step taken under an HMRC approved:SIPSAYE option schemeCSOP
(whether or not for tax avoidance purposes!) is excluded
A relevant step taken for the sole purpose of granting, holding
shares for, or satisfying EMI options is excluded
Providedthe number of shares does not exceed that required for
such purpose over the next 10 years ....... and there is no taxavoidance
Amend plan rules to provide for earmarking by an EBT?
15
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
17/89
Applies only to shares issued by the employer companyor another member of the same 51% group
5 types of exclusion:
o deferred remuneration (max 5 year)
o deferred conditional share awards
o
exit only conditional share awardso conditional (max 10 year) share options
o exit only conditional share options
16
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
18/89
Condition(s) may run for a period ending in advance ofvesting date
Minimum condition(s)? not being a bad leaver
leaving only by reason of gross misconduct?
What should be the safe minimum period ofconditionality? if too short, exclusion is lost because of tax avoidance purpose
Subsequent lifting of conditions Deferred share awards take care when setting vesting
date
17
8/3/2019 Pett - Mitigating the 50% Tax Rate
19/89
In principle, these should not, if properly structured, fall foul ofPart 7A
If, with no prior earmarking, shares jointly acquired (by
purchase or subscription) and employee pays, or suffers an
earnings charge to income tax on, the full IUMV of his
interest, then :
(a) any up-front Part 7A charge is reduced to nil by ss 554Z6 (overlapwith earnings) and 554Z8(6) (consideration given); and
(b) any subsequent relevant step relating to the employees interestis excluded by s554N(11)
Any option granted to employee to acquire trustees interest
must be on terms which satisfy the share options exclusion
18
8/3/2019 Pett - Mitigating the 50% Tax Rate
20/89
Company asks EBT to invite employees to buy sharesfrom the EBT for MV. EBT invites to each normalemployee with offer EBT earmarks shares?
No charge to tax on acquisition of shares from EBT
No immediate relief/exclusion from earlier earmarkingcharge
Possible relief if offer not taken up: s554Z14 (but is decliningor ignoring offer an event?)
HMRC attitude to timing?
Answers: structure as grant of MV option? (s554Z7)
impose short-term risk of forfeiture? (s554N(1)(b))
19
l d
8/3/2019 Pett - Mitigating the 50% Tax Rate
21/89
Transfers for consideration s554Z8
If transfer for consideration paid before, at or about time oftransfer
up to 1 week either side?
If, for example, an EBT sells shares (or interest as joint owner) toan employee for cash paid before, at or about, the transfer of
shares (etc.), then the value of the relevant step is reduced
accordingly
If:
an EBT buys shares for cash;
the shares are transferred before, at or about, the cash is paid;
there is no tax avoidance
the value of the relevant step (payment of cash) is reduced by the market value ofthe shares sold
20
Arrangement ?
Relevant Step ?
Relevant 3rd Person ?
Exclusion ?
Charge
Reduction ?
8/3/2019 Pett - Mitigating the 50% Tax Rate
22/89
Identifying a relevant third person examples:
grant of options by individual shareholders
non-51% groups
tax avoidance?
Is it reasonable to suppose that in essence: the arrangement is a means of providing rewards, recognition or
loans in connection with an employment ? and
the relevant step is in pursuance of or there is a connection
between the step and the arrangement ?
examples:
employer-provided petrol card
target co. management incentives
21
8/3/2019 Pett - Mitigating the 50% Tax Rate
23/89
Deferred payment sales of shares by an EBT transfer of shares is a relevant step
no exclusion if unconditional or requirements of s554H - M if not
met
no relief under s554Z8 (as consideration not paid before or at
about time of share transfers)
Suggestion : have employer loan the consideration
to employee who pays up-front MV for shares
22
8/3/2019 Pett - Mitigating the 50% Tax Rate
24/89
Using LLPs beware: legislation wrongly crafted
LLP is not normally the employer !
examples:
A (a member of LLP) employed by subsidiary of LLP and awardedshares:
in corporate member
in another subsidiary of LLP
Avoiding an earmarking
Earmarking in advance of an award/option grant
23
8/3/2019 Pett - Mitigating the 50% Tax Rate
25/89
Complying with the terms of an exclusion (ss554H M) s554H: beware deferred awards of shares in independent unquoted
company: if not RCAs, no PAYE due if they had been immediatelyawarded!
Remember vesting date: s554H, J = date of transfer
s554L = first (normal) exercise date
fallback charges
Amend terms of trustee engagement ?
24
8/3/2019 Pett - Mitigating the 50% Tax Rate
26/89
1. Family-owned company. Father (shareholder) grantsoption to acquire part of his holding to daughter
employed in the business exercisable after 3 years, butnot otherwise subject to any other conditions
2. Individual founder grants option to purchase shares tokey employee
25
8/3/2019 Pett - Mitigating the 50% Tax Rate
27/89
3. A key manager employed by a subsidiary of a small
independent company is granted an exit-onlyoption to subscribe for new shares in parent co. and,to secure ER relief, also acquires sharesrepresenting 5% nominal of ordinary share capital +5% voting rights
26
8/3/2019 Pett - Mitigating the 50% Tax Rate
28/89
4. Mr C is an employee of a wholly-owned subsidiary of
an LLP. He is invited (a) to subscribe for shares in SLtd, a member of the LLP and (b) accept appointmentas a director of S Ltd
27
8/3/2019 Pett - Mitigating the 50% Tax Rate
29/89
5. X plc has contributed funds to an employees trustwhich has purchased shares in X plc. 1,000 shares
have, pre 6.4.2011, been appointed to a sub-trust forMr D, an employee of a subsidiary of X plc on termsthat the shares are at risk of forfeiture if the employeeleaves within 4 years
28
8/3/2019 Pett - Mitigating the 50% Tax Rate
30/89
6. A plc seeks to acquire control of TargetCo. A plc
writes to selected managers of TargetCo. Statingthat, if the acquisition is completed, they would beentitled to acquire 1,000 treasury shares in A plc
29
8/3/2019 Pett - Mitigating the 50% Tax Rate
31/89
30
7. EBT earmarks shares for transfer to employees.
Shares become worthless
8/3/2019 Pett - Mitigating the 50% Tax Rate
32/89
Any loans to employees should be made by theemployer or another 51% group company
If paying deferred remuneration, check/amend
documentation to ensure either :
it is to be paid by the employer; or
the terms satisfy the s 554H exclusion (slides 18,19)
no deferred remuneration can be paid after the vesting date
31
8/3/2019 Pett - Mitigating the 50% Tax Rate
33/89
If EBT holds shares, avoid any fresh earmarking by withholdingdetails of the names/number of shares being awarded to individualemployees
Check terms of linking agreements, EBT/company loan
documentation, trust deeds (etc.) to avoid unexpected earmarking
Amend CSOP/SAYE plan rules? HMRC view will allow CSOP/SAYErules to provide expressly for earmarking (so that any earmarking is
under the plan and therefore excluded)
Amend trust deeds to oblige trustees not to take any relevant step
without prior company consent
32
8/3/2019 Pett - Mitigating the 50% Tax Rate
34/89
If share awards/options to be made, or satisfied by (orhedged through) an EBT, ensure the terms satisfy theexclusions in ss 554H-M as appropriate
Amend plan rules to ensure:
compliance with relevant exclusion and
shares/cash cannot be transferred/acquired after the vesting
date
vesting date is properly defined
33
8/3/2019 Pett - Mitigating the 50% Tax Rate
35/89
Re-examine the terms of cashless exercise facilitieswhich involve the making of loans (beware 40-day loansto be repaid from sales of illiquid shares)
leave exercise price outstanding against an undertaking?
Avoid arrangements involving share sales on deferredpayment terms(unless using new-issue shares)
or, have employer group company loan cash to employee to fundup-front purchase
34
8/3/2019 Pett - Mitigating the 50% Tax Rate
36/89
Part B: EBTs
35
8/3/2019 Pett - Mitigating the 50% Tax Rate
37/89
HMRC have yet to secure judicial authority in support of anearnings charge arising when trust assets were earmarkedfor an employee or loans made pre-9 December 2010 Glasgow Rangers case held over to January 2012
Authority is against them:
Sempra Metals Forde and McHugh Ltd v HMRC (re NICs)
But .......... is the tide turning?
What if evidence that loans never intended to be repaid? PA Holdings appeal
HMRC Settlement Opportunity: if HMRC secure a win on thepoint, the settlement opportunity could be withdrawn if adialogue not already established
36
8/3/2019 Pett - Mitigating the 50% Tax Rate
38/89
Case before First Tier Tribunal re what was the custom
and practice at the time as regards s43 FA 1989 (ie pre
27 November 2002)
37
8/3/2019 Pett - Mitigating the 50% Tax Rate
39/89
Clearly, many EBTs have been wrongly operated: loans made to 5%+ participators; or
trust deed not excluded 5%+ participators from ever receivingbenefits
Property appointed on revocable sub-trusts becomesrelevant property if no s13 protection (exclusion of 5%+ participators) then exit
charges
if sub-trust revoked, IhT charges under s65
If close company makes a contribution to an EBT with no s13restriction on beneficiaries, then IhT charge arises on
transfer of value apportioned to participators but chargeprimarily on the company Postlethwaite case?
cannot rely on exclusions re CT deductibility
38
8/3/2019 Pett - Mitigating the 50% Tax Rate
40/89
Note: children born after death of employee are notlinked persons
Loans to employer company (which then loans toemployee): beware if made at behest of employee
Sit tight ? leave pre-9 December 2010 loans outstanding
IhT advantages on death of employee
post-retirement extraction at lower rates of income?
invest in shares and appoint interest in dividends to employee?
Liquidate employer company? (solvent liquidation notpossible)
OR: flee to Cyprus?
39
8/3/2019 Pett - Mitigating the 50% Tax Rate
41/89
Part C: Planning againstfuture withdrawal of 50% rate
40
8/3/2019 Pett - Mitigating the 50% Tax Rate
42/89
Income tax on share awards:now or later ?
41
8/3/2019 Pett - Mitigating the 50% Tax Rate
43/89
Is it better to structure awards as restricted shareswith income tax payable up front or as nil costoptions, where income tax is payable on exerciseand when income tax rates might be lower ?
42
8/3/2019 Pett - Mitigating the 50% Tax Rate
44/89
10,000 share awards
Nominal value negligible ignored
Market value (UMV) at grant date 1
Share price growth 10% per annum
3 year conditionality
s431 election made on acquisition (to ensure all growthtaxed as capital)
Ignore dividends, present value of money
43
8/3/2019 Pett - Mitigating the 50% Tax Rate
45/89
Ignore NICs
Ignore corporate taxes
Capital gains nil rate band frozen at 10,600
Sell shares after 5 years
Sufficient cash to fund tax (ie dry tax charge acceptable)
Simultaneous reduction to top rate from 50% to 40% andCGT rate from 28% to 18%
44
8/3/2019 Pett - Mitigating the 50% Tax Rate
46/89
45
Now 1 year 2 years 3 years 4 years 5 years
1 1.10 1.21 1.33 1.46 1.61
8/3/2019 Pett - Mitigating the 50% Tax Rate
47/89
Scenarios (a), (b) and (c)
(a) Share award with s431 election Immediate income tax 50% x 10,000 x 1 = 5,000
CGT - sell after 5 years 28% x 10,000 x (1.61 - 1) = 1,708(would be zero if nil rate band available)
(b) Nil cost option Income tax on exercise after 3 years 50% x 10,000 x 1.33 = 6,650
CGT - sell after 5 years 28% x 1000 x (1.61 - 1.33) = 784
(would be zero if nil rate band available)
46
8/3/2019 Pett - Mitigating the 50% Tax Rate
48/89
(c) Assume after 3 years 50% 40% and 28% 18%
47
Nil cost optionincome tax 40% x 10,000 x 1.33 = 5,320
CGT on sale 18% x 10,000 x (1.61 - 1.33) = 504
Share awardCGT on sale 18% x 10,000 x (1.61 - 1) = 1,098
8/3/2019 Pett - Mitigating the 50% Tax Rate
49/89
48
Restricted Share Nil Cost Option
Tax Rates Current Potential Current Potential
Income Tax 5000 5000 6650 5320CGT 1708 1098 784 504
Combined 6708 6098 7434 5824
If ER appliesCombined 5610 5610 6930 5600
Share surge to 2 in year 5
Combined 7800 6800 8526 6526
Share surge to 10 in year 5
Combined 30,200 21,200 30,926 20,926
8/3/2019 Pett - Mitigating the 50% Tax Rate
50/89
If you do not expect tax rates to fall, then can be cheaperto take the upfront tax on initial value of shares with arestricted share award (providing a dry tax charge can
be funded)
But if tax rates fall it should be cheaper to grant andexercise a nil-cost option
49
8/3/2019 Pett - Mitigating the 50% Tax Rate
51/89
Allows employee flexibility to determine when toexercise and trigger tax liability. Could delay tax pointuntil later when rates fallen but beware if value surges
e.g. rates fall in year 5 but value surged
50
exercise year 3 year 5
Income Tax 6650 40000CGT 15606 _____
22256 40000
but if sale and exercise after 5 years at leastdry tax charge avoided
8/3/2019 Pett - Mitigating the 50% Tax Rate
52/89
Do you want employees or company to be able tocontrol tax point for income tax and statutory corporationtax relief and when employees become shareholders Restricted shares - shareholder at start
Contingent shares - shareholder after end of performance period
IFRS2 expense may increase with longer expected life
Employers NIC transfer
51
8/3/2019 Pett - Mitigating the 50% Tax Rate
53/89
Market value option e.g. 1 exercise price
Exercise after 3 years and assume no changes in taxrates for 5 years vsrate changes in 5 years and delayexercise
52
8/3/2019 Pett - Mitigating the 50% Tax Rate
54/89
53
Exercise after
(50%)
3 years
(40%)
5 years
Income tax & CGT
10% pa growth 2434 2440
Surge to 2 3526 4000Surge to 10 17266 36000
8/3/2019 Pett - Mitigating the 50% Tax Rate
55/89
Assume have to (and can) sell shares on exercise tofund exercise price and tax charge arising (ignoretransaction costs)
e.g. 10,000 mv option worth 1.33 per share, total value 13,300
exercise price 10,000
tax on exercise 1650
11,650
Need to sell 87.6% of shares leaving only 1240
54
8/3/2019 Pett - Mitigating the 50% Tax Rate
56/89
Value on Exit (5 years) 1.61 x 1240 = 1996
CGT 1240 x 28p x 28% = (97)
1889
OR delay exercise (tax rates still 50%)
Gain on exercise 61p x 10000 = 6100
Tax 50% (3050)
3050
55
8/3/2019 Pett - Mitigating the 50% Tax Rate
57/89
Given flexibility of nil cost option and potential to optimise taxpoint why would one ever grant a restricted share?
Consider if:
company wants control of tax point/time of issue
IFRS2 expense
shares expected to grow substantially in value but no rate changesexpected
Might not grant a restricted share as such, but would seek to
grant an unrestricted share which contained as inherentfeatures conditions which were not restrictions and so werereflected in UMV and AMV market values
56
8/3/2019 Pett - Mitigating the 50% Tax Rate
58/89
Share Incentive Plansbut keep them simple
57
8/3/2019 Pett - Mitigating the 50% Tax Rate
59/89
Offer cash bonus with choice of investing up to 1,500 (min 10) ofgross bonus in Partnership Shares
Effective 50/40/20 per cent discount
For so long as held in plan, growth in value is free of CGT
Clawback of initial relief if shares leave plan within 5 years
Share valuation issues
Shares must be offered to all eligible employees
Beware: if company sold < 3 years, clawbacks could be greater thanupfront relief
58
8/3/2019 Pett - Mitigating the 50% Tax Rate
60/89
59
Time
SaleAcquisition
Share price
> 3 -5 years
8/3/2019 Pett - Mitigating the 50% Tax Rate
61/89
60
EMI SIP
Growth in value chargedto CGT
Growth in value free of CGT
Discount on grant charged to ITon exercise
Discount (ie saving of tax onpurchase monies + value ofMatching Shares) free of tax
Ind. limit 120,000 (UMV) Ind. limit 1,500 + 3,000 +3,000 = ) 7,500 per tax year(AMV)
No dividends until sharesacquired on exercise
Dividends can be reinvestedtax-free (up to 1,500 p.a.)
Overall limit 3m (UMV) None
vs
8/3/2019 Pett - Mitigating the 50% Tax Rate
62/89
Part D: Planning ideas fordelivering future growth
61
8/3/2019 Pett - Mitigating the 50% Tax Rate
63/89
What is a JSOP or JOE?
JSOPs vstraditional m.v. share options
Experience to date
HMRC attitude
62
8/3/2019 Pett - Mitigating the 50% Tax Rate
64/89
63
Time
[3]% p.a. Carrying Cost
SaleAcquisition
Tax point
Employees gain
Thresholdamount
Co-owners gain
Share price
3 years
8/3/2019 Pett - Mitigating the 50% Tax Rate
65/89
In executing the JOA and acquiring shares (by subscription or purchase)jointly with an EBT, the employee acquires a (restricted?) beneficial interestin employment-related securities
Employee/employer must make a s431(1) election (to protect against futurecharges under Chapter 2)
What is the IUMV of the employees interest?
valuation of the jointly-owned shares
splitting that value between the joint owners
effect of the carrying cost
typical values
Insofar as employee does not pay full IUMV, employee has upfront chargeto IT/NICs subject to PAYE
best estimate: HMRC healthcheck procedure
Growth in value accruing to employee charged to CGT
No CT relief for growth in value
64
8/3/2019 Pett - Mitigating the 50% Tax Rate
66/89
In principle, these should not, if properly structured, fall foul ofDR rules:
If, with no prior earmarking, shares jointly acquired (bypurchase or subscription) and employee pays, or suffers anearnings charge to income tax on, the full IUMV of hisinterest, then :
(a) any up-front Part 7A charge is reduced to nil by ss 554Z6 (overlapwith earnings) and 554Z8(6) (consideration given); and
(b) any subsequent relevant step relating to the employees interestis excluded by s554N(11)
Any option granted to employee to acquire trustees interestmust be on terms which satisfy the share options exclusion
65
8/3/2019 Pett - Mitigating the 50% Tax Rate
67/89
Valuation
Significance of the carrying cost
No ability to agree IUMV in advance ofexecution of JOA
Will HMRC Shares & Assets Valuation accept the valuation methodology?
HMRC not obliged to agree value under health check procedure
Need to apply for a PTVC at same time ?
Policy change ?
Trapping value in an EBT: use a Guernsey/Jersey purposetrust?
66
8/3/2019 Pett - Mitigating the 50% Tax Rate
68/89
67
Time
[3]% p.a. Carrying Cost
SaleAcquisition
Tax point
Employees gain
Thresholdamount
Co-owners gain
Share price
3 years
8/3/2019 Pett - Mitigating the 50% Tax Rate
69/89
Beware transfers by EBT (1) into joint ownership ofemployee and EBT (2) section 554Z8
Issues for a close company s455 CTA 2010 loans to an EBT will give rise to 25% tax
charge is it close?
PLCs: what if no distributable reserves?
Entrepreneurs Relief from CGT recognition of joint ownership: individual to be treated as sole
beneficial owner of so many as is proportional to the value of his
share s169S(4) TCGA 1992
but, time only runs from when interest grows to represent over 5%
68
8/3/2019 Pett - Mitigating the 50% Tax Rate
70/89
Have employee agree to pay full IUMV but leave outstandingunpaid: Chapter 3C charges? only appropriate if shares subscribed by joint owners
otherwise, DR charge on relevant step by vendor EBT
Loan to employee to fund the tax? from group company
from EBT X
Pay a grossed-up bonus to fund the tax?
Invite employee to apply cash bonus in funding either IUMVof the employees interest as joint owner or the tax onacquisition?
69
8/3/2019 Pett - Mitigating the 50% Tax Rate
71/89
Participation in futuregrowth in value of shares:
other ideas
70
8/3/2019 Pett - Mitigating the 50% Tax Rate
72/89
HMRC SAV: distinction between AMV/IUMV
Variable entitlement on exit: hurdle rate of exit proceeds, below which shares worthless
other classes convert into deferred shares
Beware creating convertible securities
Rights must not be personal
71
8/3/2019 Pett - Mitigating the 50% Tax Rate
73/89
Employee invited to agree to subscribe for new sharesfor a consideration equal to their AMV/UMV, but onterms that the consideration is left outstanding againstan undertaking to pay in cash at a future date
Do not have shares sold by EBT !
If shares restricted, consider making a s431(1) election
If a plc, undertaking cannot be for more than 5 years(s587 CA 2006)
72
8/3/2019 Pett - Mitigating the 50% Tax Rate
74/89
No general earnings charge on acquisition (asconsideration MV)
If purchased from EBT, immediate DR charge unlessshares subject to short-term risk of forfeiture !
Annual notional loan charge under Chapter 3C, Part 7by reference to Official Rate (so eg 50% x 4% = 2% p.a.on amount outstanding)
Amount outstanding must be paid up when, or before,shares sold for consideration (else IT charge under
s446U) If s431(1) election made, growth in value is charged to
CGT
73
8/3/2019 Pett - Mitigating the 50% Tax Rate
75/89
Shares in a private company may be issued forconsideration in the form of an undertaking to pay at afuture date
If a plc, undertaking must not be longer than 5 years
Annual charge on notional loan unless employeeinvolved in management and conduct of a closely-heldtrading company
Real commercial and tax risk if share value falls Chapter 3D charge if shares sold for > MV
Section 446U charge if notional loan released Beware partly-paid (as to par value) shares!
ER relief: must have 5% nominal + 5% of voting rights
74
8/3/2019 Pett - Mitigating the 50% Tax Rate
76/89
If shares fall in value, it becomes a disincentive !
If amount outstanding is released or written-off, a chargeto IT (and NICs) arises on that amount
If shares sold to EBT at an overvalue, then charge arisesunder Chapter 3D, Part 7 (not under DR rules sees554N(5)(c))
If shares sold for value reflecting amount outstanding, a
s446U charge still arises !
75
8/3/2019 Pett - Mitigating the 50% Tax Rate
77/89
HMRC practice: no charge under s446U if underpayment paidup when shares are sold
If partly-paid(as to par value) shares sold for an amountwhich reflects liability to pay calls, tax still charged under
s446U on full amount of underpayment (relative to mv of afully-paid share on acquisition)
If shares acquired for MV, but on deferred payment terms, aresold but employee remains liable to pay up original
acquisition price, then (currently) a charge still arises unders446U on the sale (even if subsequently paid up). Understoodthat HMRC intend that charge should only apply if and whenthe liability is released or written off (as with an actual loan)
76
8/3/2019 Pett - Mitigating the 50% Tax Rate
78/89
If shares are held by EBT, consider having employermake a loan to employee to fund cash purchase fromEBT for AMV/UMV
to avoid a DR charge, the consideration must pass to EBTbefore, at or about the transfer of the shares
If legal title to shares retained by EBT, no further DRcharges see s554N(7) (11) or because bare legal
title of no value !
CCA: is loan recoverable ?
77
8/3/2019 Pett - Mitigating the 50% Tax Rate
79/89
Entitlement to cash sum calculated by reference tofluctuations in share price
Employee buys the security
Idea is to create a security, elect under s431(1), so thatfuture growth in value is subject to CGT
Need to establish that it is a genuine security, not amechanism for delivering a bonus
Helps to have downside risk HMRC scrutiny:
what is IUMV?
78
8/3/2019 Pett - Mitigating the 50% Tax Rate
80/89
Become self-employed?
Convert to LLP?
Have business carried on by LLP make loan to a trust forthe benefit of one or more partners?
Beware: non-s86 trust
CGT anti-avoidance provisions
ss714 751 transfer of assets abroad
is it a distribution of profit share?
79
8/3/2019 Pett - Mitigating the 50% Tax Rate
81/89
Up-front CT relief for funding a SIP to acquire a 10% interest Of interest to independent companies seeking to establish
employee ownership model or proprietors seeking a tax-efficientexit
SIP trust must acquire 10% within a 12 month period
Shares must be acquired otherwise than from a company
30% of shares must be awarded as Free, Matching or PartnershipShares within 5 years, and 100% within 10 years. If not, HMRCmay withdraw all of the relief by treating amount as taxable receiptwhen direction given
Limits, of 1,500 Partnership (with up to 3,000 Matching) and
3,000 Free shares, means that employee profile may not enablesufficient shares to be awarded in time!
If shares not awarded within 2 years (5, if not RCAs), then SIPtrustees subject to CGT on growth in value
80
8/3/2019 Pett - Mitigating the 50% Tax Rate
82/89
The individual vendor can roll-over the gain on sale toa SIP which acquires 10% or more within 12 months if,within 6 months of the SIP trust acquiring 10%, all of theconsideration is reinvested in chargeable assets,
excluding (only):
private residence
EIS shares
same group company shares
81
8/3/2019 Pett - Mitigating the 50% Tax Rate
83/89
Part E: Other points of current interest(December 2011)
82
8/3/2019 Pett - Mitigating the 50% Tax Rate
84/89
Lady Justice Arden in Astall Case if, on purposive construction, it is consistent with legislation,
doesnt matter that HMRC dont like it!
Deutsche Bank case
was the result what Parliament envisaged? Aberdeen Asset Management (money box companies)
and PA Holdings (dividends on SPV shares) form used to deliver earnings does not alter tax treatment
DR: a main purpose is the avoidance of tax or NICs G.AAR QC publishes GAAR
83
8/3/2019 Pett - Mitigating the 50% Tax Rate
85/89
HMRC assert that shares in a company of which thefounder is/will be/has been a director are employment-related securities
Not so if opportunity to acquire shares was self-
generated or by reason of personal relationship Test case awaited
HMRC challenge sale of shares to EBT/employees asbeing at greater than (fully discounted) MV (Chapter 3D,
Part 7) If sold to EBT using contribution from the company:
transactions in securities charge
84
8/3/2019 Pett - Mitigating the 50% Tax Rate
86/89
Our opportunity to effect change: allow:
restrictions as to voting rights (on unquoted shares)
pre-emption on leaving (see below)
any other restrictions if they also affect all other ordinary shares
remove:
the requirements as to other shareholdings test
Amend permitted pre-emption rights so that obligation to sell onleaving need only apply to shares of that class. Employee/directorsholding shares of any other class should not be bound to offer sharesfor sale on leaving
Allow approved plans in private-equity backed companies
SIPs: remove risk of penal clawback charge on takeover within 3years
CSOPs/SAYE: allow tax relief if company sold within 3 years
85
8/3/2019 Pett - Mitigating the 50% Tax Rate
87/89
6 April 2012 6 April 2017 Relief 50% (even if investor is 40% tax payer) 1 year carry-back allowed, [but not from 2012/13?] Investors may be directors but neither they nor associates
can be employees
Limit of 100,000 on investment qualifying for relief Company must have:
gross assets 200K (count proportion of partner entity assets) less than 25 fte employees not raised more than 150K under SEIS (blue pencil rule) carry on or establish a new qualifying trade
Investor must have not more than 30% interest Company must not be partner or member of an LLP CGT reinvestment relief for gains in 2012/13
86
8/3/2019 Pett - Mitigating the 50% Tax Rate
88/89
Questions
87
8/3/2019 Pett - Mitigating the 50% Tax Rate
89/89
David Pett
Office: 0121 348 7878
Mobile: 07836 657 658
Twitter: www.twitter.com/pettfranklin
William Franklin
Office: 0121 348 7878
Mobile: 07889 726 767Twitter: www.twitter.com/pettfranklin
www.pettfranklin.com