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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Employee benefit trusts: dispositions by an individual: conditions

Exemption for a disposition to a trust for the benefit of a company’s employees by an individual beneficially entitled to a share or shares in a company is provided by IHTA84/S28.

A similar exemption for a disposition to an Employee Ownership Trust (IHTM42995) is provided by IHTA84/S28a (IHTM42997).

The conditions

A transfer of value where shares in or securities of a company become comprised in a trust for the benefit of employees within IHTA84/S86(1) will be an exempt transfer if

  1. the persons for whose benefit the trusts permit the settled property to be applied include all or most of the persons employed by or holding office with the company
  2. at the date of the transfer, or at a subsequent date within the following year the trustees
* hold more than one half of the ordinary shares in the company, and
* have powers of voting on all questions affecting the company as a whole which, if exercised, would yield a majority of the votes that could be exercised.
  1. there are no provisions in any agreement or instrument affecting the company’s constitution or management or its shares or securities that mean the conditions in para (a) can cease to be satisfied without the trustee’s consent; and
  2. the trusts do not permit any of the settled property to be applied at any time for the benefit of
* a person who is a participator in the company

any other person who is a participator in any close company that has made a disposition (which but for IHTA84/S13 would have been a transfer of value) whereby property became comprised in the same settlement; or

* any other person who has been a participator in a close company at any time after, or during the 10 years before, the transfer of value by the individual; or
* any person who is connected with any person mentioned in the three bullet points above

IHTA84/S28 applies to transfers of value both during life and on death. An explanation of the different conditions is given below.

Condition (a)

Condition (a) repeats the provisions of IHTA84/S13(1) for dispositions by close companies. Although IHTA84/S28 does not specifically mention the company’s subsidiaries, the class of beneficiaries can include employees of the subsidiaries and also of other bodies under IHTA84/S86.

Condition (b)

Condition (b) requires that the trustees hold more than half of the ordinary shares and have control of the company. This means that the shares have been transferred to the trustees in accordance with the Articles of Association for the company concerned and trustees are able to exercise voting control within the year.  If the company’s Articles incorporate the Model Articles set out in Schedule to the Companies (Model Articles) Regulations SI 2008/3229 in un-amended form, it is necessary for the terms of Articles 27 & 28 to be met before the trustees will ‘hold’ the shares for the purposes of IHTA/S28(2)(b).

IHTA84/S28(7) applies the definition of an ordinary share contained in IHTA84/S13(5) as one which carries either;

  • a right to dividends not restricted to dividends at a fixed rate, or
  • a right to conversion into shares carrying such a right to dividends

This is the same definition as in IHTA84/S228(4). It includes deferred shares and participating preference shares. Under IHTA84/S28(3), where the company has shares or securities of any class giving powers of voting limited to the question of winding up the company and/or any questions primarily affecting shares or securities of that class, the reference in IHTA84/S28(2) to all questions affecting the company as a whole is to be read as a reference to all such questions except any in relation to which those (limited) powers are capable of being exercised.

For example, if there are preference shares which vote only on the winding up or on a resolution to reduce the preference dividends their votes will not be counted.

Condition (c)

Condition (c) provides a safeguard against the trustees being deprived of their majority holding or of control of the company.

Condition (d)

Condition (d) lists the provisions of IHTA84/S28(4), which repeat those that apply to dispositions by close companies under IHTA84/S13(2). In the rare case where the company is not a close company, the references to a participator should be taken as references to a person who would be a participator in the company if it were close under IHTA84/S13(5) as applied by IHTA84/S28(7).

The exemption will not apply if the trusts permit any of the settled property to be applied at any time, during the trust period or later (IHTM42962) for the benefit of

  • participators,
  • persons referred to in IHTA84/S28(4)(b) and (c), or
  • persons connected with them.

So, for example, a resulting trust or ultimate benefit to such a person would mean the exemption would not apply from the outset.

In practice the trust instrument usually contains a restriction on the class of beneficiaries which follows the precise terms of IHTA84/S28(4) to make sure the conditions are met.

There is an escape clause for small participators. This is provided by IHTA84/S28(5) which corresponds to IHTA84/S13(3) (see IHTM42955) for dispositions by close companies. The only exception is that there is no special provision for profit sharing schemes.

In determining whether or not a trust will meet condition (d), no account is to be taken of any power to make a payment which is the income of any person for Income Tax, or would be their income if they were resident in the UK, by virtue of IHTA84/S28(6).