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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Reliefs: employee-ownership trusts: conditions: the 'all-employee benefit requirement': cases in which the requirement is treated as met: 'application of settled property' condition: circumstances in which the 'behaviour requirement' is not infringed

TCGA92/S236L(6)-(9)

In addition to and separately from the situations in CG67848, the ‘behaviour requirement’ is not infringed where the trustees apply the settled property for the benefit of all the ‘eligible employees’ by reference to an eligible employee’s

  • remuneration,
  • length of service, or
  • hours worked,

where the following conditions are met.

  • The trustees do not apply any of the settled property on terms such that some, but not all, ‘eligible employees’ receive no benefits.  This condition does not apply where ‘eligible employees’ receive no benefits by virtue of one or more of the second to fourth situations set out in CG67848.
  • Where the settled property is applied by reference to more than one of the three factors mentioned above,
    • each factor gives rise to a separate entitlement related to the level of remuneration, length of service or hours worked and
    • the total entitlement is the sum of those separate entitlements.

Where either of these conditions is not met the ‘behaviour requirement’ is infringed.

The purpose of TCGA92/S236L is to allow certain trusts that were created before 10 December 2013 to qualify as EOTs, by being treated as meeting the ‘all-employee ownership requirement’, on the basis that the trustees have operated the trusts as if they were subject to the rules relating to that requirement.

Example 21

The trustees of the Tureis Widgets Limited EBT, which was created before 10 December 2013, allow only the senior managers, which phrase covers a number of employees as well as the company directors, of Tureis Widgets Limited to benefit from the settled property following the meeting of certain performance targets by the company.  The trustees make the payments to those senior managers on that basis on 17 October 2014.  In doing this the trustees have applied the settled property otherwise than for the benefit of all eligible employees on the same terms.  This results in the infringement of the ‘behaviour requirement’, which means that the Tureis Widgets Limited EBT cannot be treated as meeting the ‘all-employee benefit requirement’ in relation to any disposal that then takes place before 17 October 2015. 

Example 22

The trustees of the Unukalhai Widgets Limited EBT, which was created before 10 December 2013, apply settled property for the benefit of those ‘eligible employees’ of Unukalhai Widgets Limited who have six months or more of continuous employment with the company, in proportion to their working hours.  All employees who meet the requirement benefit on the same terms, and the payments are made on 14 November 2014.  Any entitlement is by reference to length of service, from a minimum of six months to a maximum of thirty years, and hours worked, but there is no separate entitlement arising from each factor.  This infringes the ‘behaviour requirement’, as the trustees have applied the settled property otherwise than for the benefit of all ‘eligible employees’ on the same terms.  The infringement does not arise from the exclusion of employees with service of less than six months, as this is an example involving the second situation in CG67848.  However, the second condition above is not met, as there are no separate entitlements related to length of service and hours worked, and the total entitlement is not the sum of those separate entitlements.  The ‘behaviour requirement’ is therefore infringed.  The Unukalhai Widgets Limited EBT cannot be treated as meeting the ‘all-employee benefit requirement’ in relation to any disposal that takes place in the 12 months up to 13 November 2015.

Example 23

The trustees of Vindemiatrix Widgets Limited EBT apply settled property for the benefit of ‘eligible employees’ of Vindemiatrix Widgets Limited who have over one year of continuous employment with the company, on the basis of 100 ‘qualifying points’ for every whole £1,000 of their annual salary and 50 ‘qualifying points’ for every complete year of service with the company.  The conditions relating to the ‘qualifying points’ are quantified as at the date of the trustees’ decision to apply the property and each ‘qualifying point’ is worth £1.  This situation differs from that in Example 22 because there are separate entitlements based on remuneration and length of service and the total entitlement is their sum.  An ‘eligible employee’ who has 10 complete years of service and a salary of £34,950 will have an entitlement of £3, 900, while an ‘eligible employee’ with 25 complete years of service and a salary of £18,100 will have an entitlement of £3,050.