Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Employment Income Manual

From
HM Revenue & Customs
Updated
, see all updates

Employment income provided through third parties: the Section554A gateway: examples: EBTs

Sections 554A to 554D ITEPA 2003

Example: bonus
Example: deferred bonus
Example: asset reallocated
Example: earmarking followed by clarification
Example: existing sub-fund
Example: change of trustees

Here are some examples involving EBTs.

The EBT arrangement will meet condition 1 and either condition 2 or condition 3 in EIM45025. And the trustees will be a relevant third person.

For other examples involving loans, see EIM45120.

Top of page

Example: bonus

After 5 April 2011, the trustees of an EBT pay a productivity bonus of £1 million to an employee, A. This is not a loan; A does not have to repay the money.

This payment is a relevant step within Section 554C(1)(a).

The arrangement therefore comes through the Section 554A gateway.

Top of page

Example: deferred bonus

A and his employer, B plc, enter into an incentive plan whereby, some years in the future, employee A will receive a performance-related bonus.

B plc has set up an EBT to administer its incentive plans.

After 5 April 2011, the trustees of the EBT foresee that, some years in the future, they may be called upon to pay A his performance-related bonus. So they earmark £1 million of trust funds with a view to making this future payment.

The earmarking is a relevant step within Section 554B.

The arrangement therefore comes through the Section 554A gateway even though, at this stage, A has not actually received his bonus and it is not known whether he ever will or, if he does, how much he will receive.

Whether the value of the relevant step (the £1 million earmarked) will count as employment income of A will depend on the terms of the incentive plan.

It may be that the exclusion for earmarking of deferred remuneration in Section 554H will prevent the relevant step from giving rise to Part 7A income. See EIM45255 onwards.

Top of page

Example: asset reallocated

The trustees of an EBT earmark an asset before 5 April 2011.

After 5 April 2011, the trustees earmark, provide or otherwise make available the asset in a way which comes within Section554B, 554C or 554D.

The original allocation does not give rise to Part 7A income, because the Part 7A rules were not in force at that time.

The earmarking, provision or making available of the asset after 5 April 2011 is a relevant step, and will give rise to Part 7A income.

Whether or not the trustees have earmarked or made the asset available before is irrelevant. But see EIM45935 onwards for the reduction in the value of the relevant step that may apply if the earlier earmarking was taxed as A’s earnings from the employment.

Top of page

Example: earmarking followed by clarification

The trustees of an EBT have already earmarked a sum of money or asset in favour of an employee, Clare. This was a relevant step within Section 554B. Whether the arrangement came through the Section 554A gateway will depend, in particular, on when the relevant step was taken.

Clare gives the trustees a letter of wishes indicating how she would like the trustees to allocate this amount in the event of her death.

In general (and in the absence of clear indications to the contrary), we accept that a sum of money or asset that has already been earmarked for an individual employee is not subject to a further act of earmarking simply by virtue of it being clarified that the later relevant step could also be taken in favour of a member of the employee’s family.

But the position would different if the sum of money or asset was ‘unearmarked’ and then reearmarked. See ‘Example: asset reallocated’ above.

See also ‘Example: pension sharing on divorce’ in EIM45130.

Top of page

Example: existing sub-fund

Before the Part 7A rules came into force, the trustees of an EBT earmarked a sum of money by putting it into a sub-fund.

For as long as no further action is taken in relation to the sum of money, the arrangement will not come through the Section 554A gateway.

If the trustees take a relevant step under Section 554C or 554D after 5 April 2011 (or after 8December 2010 if the anti-forestalling rules are in point), the step will give rise to Part 7A income.

If the trustees take new acts of earmarking in relation to the sub-fund after 5 April 2011, these acts will give rise to Part 7A income.

Top of page

Example: change of trustees

An employer establishes an EBT. There is a change in the trustees of the EBT.

A change in the membership of the body of trustees is not a relevant step. So, the arrangement will not come through the Section 554A gateway.