Ken Moody explains an important recent development, which impacts on the scope of an exception from the employment-related securities rules for shares acquired through personal relationships.
Shares acquired by directors and employees are generally deemed to be acquired by reason of their employment, and are therefore employment-related securities (ERS) (ITEPA 2003, s 421B(3)).
An exception is made, however, where:
- The person by whom the right or opportunity is made available is an individual, and
- The right or opportunity was made in the ‘normal course of domestic, family or personal relationships’.
HMRC guidance
HMRC guidance in the Employment Related Securities manual at ERSM20220 adopts a ‘common sense’ view of the exception. It gives the example of a father on retirement passing his shares to his son and daughter, who are also employees of the company. The earlier guidance, withdrawn in 2012, in effect extended the exception at s 431B(3) where a controlling individual or family had ‘procured’ an issue of shares by the company in those circumstances.
However, the ‘Form 42’ guidance on the ERS compliance requirements was drawn together at ERSM140000 onwards and until recently (at ERSM140070) echoed the former guidance at ERSM20220 concerning the procurement of an issue of shares by a controlling individual or family.
Obviously, both interpretations could not be correct, though one could perhaps have argued ‘legitimate expectation’ if relying upon the guidance at ERSM140070.
Change in the guidance
I raised the disparity with HMRC’s Employee Share Schemes Unit (ESSU) and, eventually, received a response stating that the guidance at ERSM140070 had been amended to agree with ERSM20220.
This is helpful in order to avoid confusion, but the earlier guidance was practically useful and arguably tenable. After all, it does not state in terms at s 431B(3) that the acquisition must be from an individual but that the right or opportunity must be provided by an individual. If a company is controlled by an individual or family it could be argued that the right or opportunity has been provided by that individual or family, albeit that the shares are issued by the company.
The ESSU considers that ‘the deeming provisions of Part 7 are quite subjective’ and that ‘any acts of procurement and whether or not any exemptions would apply would … be considered on a case by case basis’. In practical terms, this means that the exception at s 431B(3) cannot be relied upon unless the circumstances meet the ‘plain vanilla’ test.
It is worth remembering at this point that no income tax charge should arise on ‘general earnings’ within ITEPA 2003, s 62 in relation to the acquisition provided no employment reward is involved.
Practical tip
If a controlling individual or family wishes to transfer shares (e.g. to a son or daughter) as part of succession planning, it will usually be preferable for shares to be gifted by the individual (or individuals) to give greater certainty that the exception will apply.
Alternatively, the company could issue the shares, placing no reliance upon ITEPA 2003, s 431B(3). As noted above, no income tax charge should arise on a genuine gift and there appears to be no reason why a protective s 431 election may not be made (if the shares are restricted), thus opting out of the ‘chargeable events’ regime of ITEPA 2003, Pt 7, Ch 2. There may be later exposure under other Chapters of Part 7, but these target specific tax avoidance situations, which in most cases will not be relevant.
Finally, a non-statutory clearance application could be considered, though HMRC does not give clearances on matters of fact, so the result may not be useful.
