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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Employment income provided through third parties: amount of Part 7A income: overlap with earlier relevant step

Section 554Z5 ITEPA 2003

Conditions
Overlap
Reduction under Section 554Z5 if sum or asset P overlaps all of sum or asset Q
Example: overlap relief
Reduction under Section 554Z5 if sum or asset P overlaps only part of sum or asset Q
Indirect overlap

Section 554Z5 prevents double counting if there is an overlap with an earlier relevant step and the specified conditions are met.

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Conditions

Section 554Z5 reduces the value of the relevant step under review if there is ‘overlap’ between:

  • the sum of money or asset (‘sum or asset P’) which is the subject of the relevant step, and
  • the sum of money or asset (‘sum or asset Q’) which was the subject of an earlier relevant step which gave rise to Part 7A income in respect of A’s employment with B.

But Section 554Z5 cannot reduce the value of the relevant step below nil.

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Overlap

There is overlap between sum or asset P and sum or asset Q so far as:

  • they are the same sum of money or asset, or
  • sum or asset P, essentially, replaces sum or asset Q.

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Reduction under Section 554Z5 if sum or asset P overlaps all of sum or asset Q

You take three steps to reduce the value of the relevant step if the overlap covers the whole of sum or asset Q.

Step 1. Calculate the value of the earlier relevant step after any reductions under:

* Section 554Z4 (residence issues), see [EIM45720](https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim45720),
* Section 554Z5, or
* Section 554Z7 (exercise price of share options), see EIM45740 onwards.

This value is not necessarily the amount of the Part 7A income generated by that step, because you ignore any reductions under Section 554Z6 or Section 554Z8 (see EIM45735 and EIM45755 onwards respectively).

Step 2. Calculate the value of the relevant step under review after any reductions under Section 554Z4.

Step 3. Reduce the value of the relevant step calculated at Step 2 by the value of the earlier relevant step calculated at Step 1.

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Example: overlap relief

On 1 July 2011 Employer B contributes a freehold property into an offshore trust.

The property has a market value of £1.2 million. It is immediately allocated into a sub-fund to be applied for the benefit of employee A’s spouse and children.

The allocation of the value of £1.2 million into the sub-fund is an earmarking relevant step within Section 554B (see EIM45095) and the arrangement comes through the Section 554A gateway (see EIM45025). The earmarked amount of £1.2 million counts as employment income of A on 1 July 2011 and is taxable accordingly.

On 1 March 2012 the trustee sells the freehold property and receives net proceeds of £1.1million.

On 15 March 2012 the trustee uses the proceeds to fund a loan of £1 million to A.

This is a relevant step within Section 554C (see EIM45060). As the advance of the loan is a step that involves a sum of money, the starting point for working out the value that counts as employment income is the full amount of the sum involved, namely £1 million (see EIM45710).

However, this sum is directly referable to the earmarked amount of £1.2 million that has already counted as employment income of A within Part 7A.

Using the three steps set out above, you calculate the overlap as follows.

Step 1: The value of the earlier relevant step was £1.2 million.

Step 2: The value of the current relevant step is £1 million.

Step 3: You reduce the value calculated at Step 2 by the value calculated at Step 1 (but not beyond nil). So the value of the current relevant step is reduced to nil.

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Reduction under Section 554Z5 if sum or asset P overlaps only part of sum or asset Q

You take four steps to reduce the value of the relevant step if the overlap covers only part of sum or asset Q.

Step 1. Calculate the value of the earlier relevant step after any reductions under:

* Section 554Z4 (residence issues), see [EIM45720](https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim45720),
* Section 554Z5, or
* Section 554Z7 (exercise price of share options), see EIM45740 onwards.

This value is not necessarily the amount of the Part 7A income generated by that step, because you ignore any reductions under Section 554Z6 or Section 554Z8 (see EIM45735 and EIM45755 onwards respectively).

Step 2. Determine, on a just and reasonable basis, the part of the value calculated at Step 1 which corresponds to the part of sum or asset Q covered by the overlap.

Step 3. Calculate the value of the relevant step under review after any reductions under Section 554Z4.

Step 4. Reduce the value of the relevant step calculated at Step 3 by the result of Step 2.

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Indirect overlap

Sum or asset P can also overlap another sum or asset indirectly. Suppose, in Step 1, Section 554Z5 reduced the value of the earlier relevant step because sum or asset Q overlapped another sum of money or asset (‘sum or asset #3’). Then sum or asset P overlaps sum or asset #3 to the extent that it overlapped with sum or asset Q.

This means that you have to apply Section 554Z5 again, reducing the value of the relevant step whose subject is sum or asset P. This time you reduce it by reference to the value of sum or asset#3.