pett - mitigating the 50% tax rate

8/3/2019 Pett - Mitigating the 50% Tax Rate

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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

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Part A: Disguised Remuneration

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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


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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!

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Arrangement ?

Relevant Step ?

Relevant 3rd Person ?

Exclusion ?

Charge

Reduction ?


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Earmarking or quasiearmarking

s554B

Payment, loan or transferof money or assets554C

5

Making an assetavailables554D

Arrangement ?

Relevant Step ?


Exclusion ?

Charge

Reduction ?


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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)

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Arrangement ?

Relevant Step ?


Exclusion ?

Charge

Reduction ?


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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 ?


Exclusion ?

Charge

Reduction ?


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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

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Arrangement ?

Relevant Step ?


Exclusion ?

Charge

Reduction ?


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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

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Arrangement ?

Relevant Step ?


Exclusion ?

Charge

Reduction ?


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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

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Arrangement ?

Relevant Step ?


Exclusion ?

Charge

Reduction ?


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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

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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

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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))

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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

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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?

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Arrangement ?

Relevant Step ?


Exclusion ?

Charge

Reduction ?


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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

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Arrangement ?

Relevant Step ?


Exclusion ?

Charge

Reduction ?


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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

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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

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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))

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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

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Arrangement ?

Relevant Step ?


Exclusion ?

Charge

Reduction ?


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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

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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

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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

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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 ?

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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

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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

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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

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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

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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

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7. EBT earmarks shares for transfer to employees.

Shares become worthless


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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

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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

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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

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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

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Part B: EBTs

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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

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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)

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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

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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?

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Part C: Planning againstfuture withdrawal of 50% rate

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Income tax on share awards:now or later ?

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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 ?

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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

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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%

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Now 1 year 2 years 3 years 4 years 5 years

1 1.10 1.21 1.33 1.46 1.61


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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)

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(c) Assume after 3 years 50% 40% and 28% 18%

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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


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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


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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

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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


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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

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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

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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


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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

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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

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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

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Share Incentive Plansbut keep them simple

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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

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Time

SaleAcquisition

Share price

> 3 -5 years


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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

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Part D: Planning ideas fordelivering future growth

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What is a JSOP or JOE?

JSOPs vstraditional m.v. share options

Experience to date

HMRC attitude

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Time

[3]% p.a. Carrying Cost

SaleAcquisition

Tax point

Employees gain

Thresholdamount

Co-owners gain

Share price

3 years


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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

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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

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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?

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Time

[3]% p.a. Carrying Cost

SaleAcquisition

Tax point

Employees gain

Thresholdamount

Co-owners gain

Share price

3 years


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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%

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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?

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Participation in futuregrowth in value of shares:

other ideas

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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

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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)

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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

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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

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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 !

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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)

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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 ?

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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?

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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?

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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

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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

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Part E: Other points of current interest(December 2011)

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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

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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

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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

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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

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Questions

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David Pett

[email protected]

Office: 0121 348 7878

Mobile: 07836 657 658

Twitter: www.twitter.com/pettfranklin

William Franklin

[email protected]

Office: 0121 348 7878

Mobile: 07889 726 767Twitter: www.twitter.com/pettfranklin

www.pettfranklin.com

pett - mitigating the 50% tax rate

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