13 December 2000
Employee trust
My client is a settlement for the benefit of employees of a trading company. The assets of the settlement comprise 100 per cent of the shares in the trading company and a bank account. The trustees are contemplating disposing of their shareholding in the company either directly to the employees or by sale to an unconnected third party followed by a distribution of the proceeds to the employees.
What would be the tax implications of these proposed disposals of shares for both the trust and the employee/beneficiaries?
(Query T15,724) – Benny Fishery.
My client is a settlement for the benefit of employees of a trading company. The assets of the settlement comprise 100 per cent of the shares in the trading company and a bank account. The trustees are contemplating disposing of their shareholding in the company either directly to the employees or by sale to an unconnected third party followed by a distribution of the proceeds to the employees.
What would be the tax implications of these proposed disposals of shares for both the trust and the employee/beneficiaries?
(Query T15,724) – Benny Fishery.
Employee trust
My client is a settlement for the benefit of employees of a trading company. The assets of the settlement comprise 100 per cent of the shares in the trading company and a bank account. The trustees are contemplating disposing of their shareholding in the company either directly to the employees or by sale to an unconnected third party followed by a distribution of the proceeds to the employees.
What would be the tax implications of these proposed disposals of shares for both the trust and the employee/beneficiaries?
(Query T15,724) – Benny Fishery.
A precedent in which trustees exercised their powers so as to wind up a trust and distribute its assets among employees can be seen in Bray v Best, of which the Commissioners' decision was reported at [1986] STC 96, upheld at [1986] STC 159. Throughout, the character of the receipts by the employees was established as that of emoluments.
The theoretical and practical difficulty concerned the need to allocate the distributions to years of assessment within Schedule E. For ex-employees, there was no source within Schedule E at the time of the distributions, which could not be arbitrarily attributed to the prior years of service.
This outcome offended against the Government's notion that every receipt should be taxable, and appropriate legislation is now found in sections 148, 202A and 202B, Taxes Act 1988. The present rule is that any ex-employee is taxable in the year of receipt of the cash or benefit.
The trustees have the duty to operate pay-as-you-earn, since the company is still trading and, apparently, all beneficiaries are still employed by it. Chapter V of Part V, Taxes Act 1988 widens the scope of that deduction machinery and, from the Inland Revenue Employer's further guide to pay-as-you-earn and National Insurance contributions it appears that the trustees should deduct and account for income tax at the basic rate. The possible incidence of National Insurance contributions is best discussed with the tax office which deals with the company. - M.C.N
In theory the trust is liable to capital gains tax on any disposal or transfer at undervalue (see section 17(1), Taxation of Chargeable Gains Act 1992). In addition the employees concerned will be taxable on the sums received, in accordance with Bray v Best [1989] STC 159. United Kingdom resident trustees must deduct tax under pay-as-you-earn for payments made to employees. (Clark v Oceanic Contractors Inc [1983] STC 35).
This effective double taxation is alleviated when Extra-Statutory Concession D35 applies – which broadly speaking means that the employee trust is within section 86, Inheritance Tax Act 1994, but without the restrictions in subsection (3), and provided that the employee in question is not a person of the kind described in section 28(4), Inheritance Tax Act 1984, and is not excluded by subsection (5).
Where the Concession applies and shares are transferred to the employees direct, the Schedule E charge will apply, but the trust will not be subject to capital gains tax on the market value of the shares transferred. By implication, if the shares were disposed of by the trust and the funds then distributed, both capital gains tax and the Schedule E charge would apply.
There is a further possibility of relief where Extra-Statutory Concession D35 does not apply. A joint 'holdover' election under section 165, Taxation of Chargeable Gains Act 1992 might be available if the asset transferred is shares in either an unquoted trading company or group or the transferor's personal holding or his trading company or group. Generally, a company will qualify as a personal company if as little as 5 per cent of voting shares are held by the transferor and his associates. - Cazenover.
My client is a settlement for the benefit of employees of a trading company. The assets of the settlement comprise 100 per cent of the shares in the trading company and a bank account. The trustees are contemplating disposing of their shareholding in the company either directly to the employees or by sale to an unconnected third party followed by a distribution of the proceeds to the employees.
What would be the tax implications of these proposed disposals of shares for both the trust and the employee/beneficiaries?
(Query T15,724) – Benny Fishery.
A precedent in which trustees exercised their powers so as to wind up a trust and distribute its assets among employees can be seen in Bray v Best, of which the Commissioners' decision was reported at [1986] STC 96, upheld at [1986] STC 159. Throughout, the character of the receipts by the employees was established as that of emoluments.
The theoretical and practical difficulty concerned the need to allocate the distributions to years of assessment within Schedule E. For ex-employees, there was no source within Schedule E at the time of the distributions, which could not be arbitrarily attributed to the prior years of service.
This outcome offended against the Government's notion that every receipt should be taxable, and appropriate legislation is now found in sections 148, 202A and 202B, Taxes Act 1988. The present rule is that any ex-employee is taxable in the year of receipt of the cash or benefit.
The trustees have the duty to operate pay-as-you-earn, since the company is still trading and, apparently, all beneficiaries are still employed by it. Chapter V of Part V, Taxes Act 1988 widens the scope of that deduction machinery and, from the Inland Revenue Employer's further guide to pay-as-you-earn and National Insurance contributions it appears that the trustees should deduct and account for income tax at the basic rate. The possible incidence of National Insurance contributions is best discussed with the tax office which deals with the company. - M.C.N
In theory the trust is liable to capital gains tax on any disposal or transfer at undervalue (see section 17(1), Taxation of Chargeable Gains Act 1992). In addition the employees concerned will be taxable on the sums received, in accordance with Bray v Best [1989] STC 159. United Kingdom resident trustees must deduct tax under pay-as-you-earn for payments made to employees. (Clark v Oceanic Contractors Inc [1983] STC 35).
This effective double taxation is alleviated when Extra-Statutory Concession D35 applies – which broadly speaking means that the employee trust is within section 86, Inheritance Tax Act 1994, but without the restrictions in subsection (3), and provided that the employee in question is not a person of the kind described in section 28(4), Inheritance Tax Act 1984, and is not excluded by subsection (5).
Where the Concession applies and shares are transferred to the employees direct, the Schedule E charge will apply, but the trust will not be subject to capital gains tax on the market value of the shares transferred. By implication, if the shares were disposed of by the trust and the funds then distributed, both capital gains tax and the Schedule E charge would apply.
There is a further possibility of relief where Extra-Statutory Concession D35 does not apply. A joint 'holdover' election under section 165, Taxation of Chargeable Gains Act 1992 might be available if the asset transferred is shares in either an unquoted trading company or group or the transferor's personal holding or his trading company or group. Generally, a company will qualify as a personal company if as little as 5 per cent of voting shares are held by the transferor and his associates. - Cazenover.
