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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

HM Revenue & Customs
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Schedule 4 Company Share Option Plan (CSOP): Eligibility of individuals to participate: The "no material interest" requirement: Beneficiaries of trusts

Beneficiaries of a trust are not counted as associates of other beneficiaries or of the trustees. But the trustees are associates of every beneficiary.  

A trust may therefore hold enough shares to confer a material interest on a participant who is a designated beneficiary under the terms of the trust deed, even if the individual only has a remote chance of actually benefiting from the trust. An example might be a discretionary family trust which has the family company’s employees as residual beneficiaries only in case the family members all die.

The shares held by trustees may be excluded from a beneficiary’s interests for material interest purposes if the beneficiary of such a discretionary trust irrevocably disclaims his eligibility to benefit under it (paragraph 14). Further information about irrevocable disclaimers is at ETASSUM42370.

It may not always be appropriate to disclaim benefits under employee benefit trusts. But as it may be possible, at the discretion of the trustees, for a particular employee to receive all the shares in the trust, the trustees’ interests cannot be ignored altogether. Provisions were therefore enacted in 1989 for beneficiaries of certain employee benefit trusts under which, even if potential benefits are not disclaimed, the whole of the interests held by the trustees may not have to be aggregated with those of the beneficiary for material interest purposes (paragraph 13).

The provisions of paragraph 13 are considered in detail at ETASSUM42400, but the principal effects are that:

  • trustees of such employee benefit trusts are not to be considered associates of a beneficiary of the trust who does not beneficially own (with his other associates) 30% of the ordinary share capital of the company (25% in the case of CSOP options granted before 17 July 2013),
  • instead, the beneficiary is considered, for material interest purposes, to be the beneficial owner of a particular percentage of the ordinary share capital of the company which is held by the trust. The percentage is based on a “look-through” approach, comparing the extent to which the beneficiary has actually benefited from the trust during a specified period. The dividend income received by the beneficiary is compared to the dividend income received by the trustees (in that specified period) in respect of the shares held by the trust.
  • Guidance on the treatment of shares held by the trustees of a Schedule 2 Share Incentive Plan (SIP) trusts is at ETASSUM42390.