The disguised remuneration rules in section 554A and Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) were introduced in December 2010. They apply a charge to income tax on certain payments made by an employer to a third party for the benefit of an employee. These rules will frequently apply where the employer makes a payment to a third party that is earmarked for the benefit of an employee. The tax charge will apply when the payment is made to the third party. HMRC has recently issued some new guidance on earmarking under the disguised remuneration provisions (HMRC – EIM45131 – Employment income provided through third parties; relevant steps). One of these deals with the appointment of shares by family trusts.
The HMRC example considers a situation where a controlling shareholder who has formed a business transfers his controlling interest in the company to a discretionary trust for the benefit of his children. This trust is not an Employee Benefit Trust. Many years later, the trustees appoint shares in differing proportions to two of the settlor’s children who are part time employees of the company. The question then arises as to whether this type of arrangement falls within section 554A of ITEPA 2003.
In this connection, HMRC states that while using trusts to pass on assets to future generations does not, of itself, constitute an arrangement falling with section 554A, if ‘the estate planning is combined with remuneration planning’, then the arrangement will fall within the legislation. In this respect the guidance then highlights a list of questions which are intended to assist in determining whether or not the arrangement is one capable of falling within section 554A.
On a disposition by the trustees of shares from the trust fund to individuals working for the company, then those shares are likely to become employment-related securities, and chargeable under section 62 or Part 7 of ITEPA 2003. In this example, on the basis that the trustees are both the controlling shareholder in the company and a participator in the employer company which is a relevant close company, the trustees would therefore be connected with the children’s employer. As a result, any shares acquired by employees in the company would be deemed to be received by reason of employment and taxable as such. Relief from charges under the disguised remuneration provisions on the disposition itself would be available to the extent that the shares were subject to income tax under other charging provisions in ITEPA 2003.
In contrast, if the trustee makes advance plans concerning future appointments of shares to employee beneficiaries, and these are connected with the employer’s remuneration policy, earmarking charges under the disguised remuneration provisions charges could arise before the appointment of shares out of the trust when no other tax charges would arise. This possibility is not raised in the HMRC example.
This new example confirms that HMRC considers that a family trust (not an EBT) can fall within the scope of the disguised remuneration legislation in certain circumstances, for example, if the facts indicate some connection with remuneration or reward from employment. The wording of the disguised remuneration legislation is broad enough to cover this kind of arrangement and does not include a specific exemption for transactions carried out in the context of family relationships. However, HMRC have indicated in other parts of the EIM guidance on disguised remuneration that steps taken in the normal course of domestic, family or personal relationships may not be connected with employment.