The period for consultation in response to “The Taxation of Trusts: A Review”, published by HMRC on 7 November 2018, ended at the end of February 2019. The Share Plan Lawyers’ Group has taken the opportunity to submit a number of suggestions for change in the light of practical experiences in the application of the legislative provisions to employees’ trusts established for normal commercial purposes, rather than as part of a tax avoidance scheme.
1. The requirements of s86 IhTA have long been ‘honoured in the breach’ and there is a need for it to be recast so as to make clear that a discretionary settlement for a class comprising bona fide employees (including ‘workers’) of any company which is from time to time a member of the 51% group of companies of which the settlor company is the parent, will be a ‘s86 trust’. This should be regardless of whether the employer company carries on a “trade or profession or undertaking”, or of the fact that different members of the same group might carry on disparate trades or undertakings. This should be an additional test which, if satisfied, means that s86 may be taken to be satisfied. Put another way, a trust for employees of a group of companies of which the settlor is the ultimate parent, should satisfy the gateway requirements of s86 regardless of the activities of that group or of any particular employer member of it.
Corresponding and consequential amendments would be needed to ss28 (so as to add wording similar to that in ss13(1)(b)) and 75 so as ensure a consistent approach.
2. There is a strong case for allowing an employees’ trust intended to satisfy s86 to be drafted in a manner which allows for the interposition of a new holding company (with no substantial change of ultimate ownership) so that, thereafter, the class of beneficiaries may be taken to include (also) employees of the new holding company – allowing for a hive-up of the business and a continuity of the use of the trust. The existing position is that if such a new holding company is interposed, and the trade hived-up, the old holding company must be kept in existence solely for the purposes of ensuring that the trust may be applied to benefit (existing, but not new) employees of the hived-up trade and/or employees of other subsidiaries of what was the old group holding company. If the old holding company is wound up, there will then be no employee of that company or of any former “subsidiary” of that company. Keeping in place the old holding company in this situation is an unnecessary administrative burden.
3. In s13, sub-sections (4)(a) should be amended so as to make clear that a power to apply the trust fund in the provision any benefit paid out to, or for the benefit of, a beneficiary which gives rise to a charge to income tax on the part of that beneficiary as either a general earnings charge, or under Parts 7 and/or 7A of ITEPA will not mean that the requirements of s13 are not satisfied. Whilst HMRC appear to accept that a power to make a payment which gives rise to a charge to income tax, such as a one-off transfer of shares, is within ss(4)(a), the exemption in that sub-section could be read as applying only to payments which, as a matter of general law, are in the nature of income, as opposed to payments of a capital nature (e.g. an award of shares) which happen to be brought into charge to income tax under specific legislative provisions. Such a clarification would allow the larger close companies to make contributions without fear of triggering s94 charges where the purpose is to allow the trust to satisfy contingent share awards and L-TIP awards.
4. Sections 72 (transfers out of a s86 trust) and s65 (transfers out of a non-s86 trust) need to be amended so as to make clear that both a transfer of shares and the grant of an employment-related securities option in circumstances in which (a) a charge to income tax arises either as a general earnings charge or under Parts 7A or 7; or (b) s425(2) applies to the acquisition; or (c) the option is acquired by a member of the class of beneficiaries and s 475(1) applies to the acquisition (i.e. adopt the wording of the DR exclusion in s554N(1) and(2)). In other words, it should be made clear that the grant of a discounted option, or transfer of shares at an undervalue, does not trigger an ‘exit charge’.
5. Is there a case for seeking an exemption from inheritance tax for a gift of shares into a s86/s13 employees’ trust by an individual shareholder which is less than a controlling interest? Why should a minority shareholder wishing to gift or bequeath shares to an employees’ trust should not do so without having to rely on the availability of BPR?
Capital Gains Tax issues
6. There is a need for s239ZA to be amended so as to secure that no chargeable gain arises to the trustees upon a transfer of shares to an employee whether or not he or she gives any amount of consideration for the shares, and whether or not he or she is an ‘excluded participator’.
The principal reason why employees’ trusts are established offshore is the fact that onshore trustees remain at risk of charges to CGT if, for example, an employee purchases shares from the trust at an undervalue. Such a disposal by an offshore employees’ trust is normally outside the scope of UK capital gains tax. It is difficult to see any reason of policy why the tax treatment of onshore and offshore trustees should not be put onto a ‘level playing field’ so as to at least avoid the existing positive discrimination in favour of going offshore. Removing the justification for establishing an employees’ trust offshore would significantly reduce the cost to UK companies, and simplify the process, of using an employees’ trust to warehouse shares intended to be used to satisfy employee share awards and options.
Income tax: dividend income
7. Whilst it is a term of most employees’ trusts that dividends are waived on shares held, employees to whom deferred share awards and options are granted being paid corporation tax-deductible bonuses in lieu of dividends paid in the award period, that is not always the case. If dividend income is not waived, it is suggested that there should be both (a) an exemption from income tax, in the hands of the trustees of an employees’ trust if such dividend income on shares in the employer company (or its holding company) is distributed within, say, 3 months of receipt, on an ‘all-employee’ basis to qualifying employees and former employees; and (b) a legislative provision that such distributions be treated for all tax purposes as dividend income of the employee recipients.
This would be ‘self-policing’ in that the extent of the relief afforded is dependent upon the availability of distributable profits and the size of the trust’s holding of shares. To prevent abuse, it would need to be provided that this favourable treatment is only available if (a) the shares are in the ultimate group holding company and not in a company under the control of another body corporate; and (b) if the company has more than one class of ordinary shares in issue, the shares held by the trust are of the largest class in issue and do not have any rights or restrictions which are less favourable to the holder than those attaching to any other class of share.
It is suggested that, at the very least, Extra-Statutory Concession B18 should be enacted so as to allow non-UK trusts in receipt of UK dividend income which is distributed to UK employees, to reduce their liability to UK tax by reference to PAYE income tax paid, in much the same way that UK trusts are presently able to do under s496B Income Tax Act 2007. Under existing practice, a UK beneficiary of an offshore trust may, under ESC B18, make a claim to secure a credit for tax paid by the offshore trustee, but this is simply not practicable in many cases.
Tax-favoured plans (SIPs, SAYE, CSOP and EMI)
8. A company under the control of an employees’ trust with a single corporate trustee cannot (unless, exceptionally it is an “employee-ownership trust” of the type mentioned in s326H et seq TCGA 1992) make awards or grant options under such tax-favoured plans (because, although the company is not a 51% subsidiary of another body corporate – the trustee – , it will still be under the control of that other body corporate). By contrast, if the trustees were individuals or two or more unconnected trustee companies, the company could do so (if all other requirements are satisfied). It cannot have been intended, as a matter of policy, that the ability to take advantage of such tax-favoured schemes would depend upon the identity of the trustee(s).
It is therefore suggested that a company which is (i) under the control of a single corporate trustee (which, in its capacity as trustee, is not itself a 51% subsidiary) of an employees’ trust, and (ii) not under the control of any other person or persons, should be treated as ‘independent’ for these purposes so as to allow access to such tax-favoured schemes.
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March 2019
David Pett, Tax Barrister 