Following on from the draft legislation announced on 9 December 2010, we would like to set out Ogier's position as to our existing trust arrangements.
The types of plans immediately affected by the legislation are trusts and other vehicles used to deliver incentive plans in the form of cash deferral arrangements and alternative pension arrangements such as EFRBS (but exclude QROPS - qualifying registered overseas pension schemes). It may also, as currently drafted, have an impact on certain share plan transactions such as loans to employees.
Although the legislation is effective from 6 April 2011, there are certain anti-forestalling measures introduced with effect from 9 December 2010, thus capturing existing plans in the legislation and any new transactions initiated in those plans that are caught by the new rules.
Cash Deferral Plans
Our immediate suggestion is that employers do not make sweeping changes to their existing plans until more certainty on the fund form of the legislation exists.
We are working with several leading tax advisors who are lobbying the UK Government to firstly clarify their intentions through the legislation and secondly to have certain forms of plans exempted from the legislation. An example would be plans that would meet the FSA's Remuneration Code that takes effect from 1 January 2011 eg: deferral of bonuses into structures for a period of time to retain individuals and ensure that they meet certain targets or performance criteria before their bonuses vest and they are taxed on the proceeds received.
New contributions to trusts should be reviewed by tax advisors prior to the making of such payments. Although we understand that the receipt of new contributions between 9 December 2010 and 5 April 2011 may not trigger a tax charge, even if "earmarked" for certain beneficiaries, there are various ways in which the legislation can be interpreted. We would therefore like to have a tax review prior to accepting new trust assets to ensure that we do not inadvertently trigger a tax charge on the individuals involved.
Loans made to individuals between 9 December 2010 and 5 April 2011 will not trigger a tax charge unless the loan remains outstanding on 6 April 2012, at which point a tax charge will be triggered. Bridging loans whilst beneficiaries rearrange their financial affairs can therefore be accommodated during the next few months, however loans taken out after 5 April 2011 will trigger the new income tax charge on drawing down the loan.
Participants who would like to benefit from the tax free roll-up of investment returns and who do not require loans from the trust can, we understand, still take advantage of such arrangements. We would recommend that personal tax advice is taken to fully understand the tax position.
Employer Financed Retirement Benefit Schemes (ERRBS)
None of the EFRBS plans that Ogier administer allow for loans to be made to participants. This lowers the overall risk that a trigger event may occur and thus create a tax liability in relation to a benefit provided from the trust. We would still encourage employers and members to ensure that tax advice is obtained to understand how the plan can best be operated under the current legislation.
Our understanding is that the existing plans can continue, with new contributions potentially being possible until 5 April 2011. Again, we would encourage companies to take tax advice prior to making further contributions to the trust.
The provision of benefits post retirement will trigger employment tax charges, however this was always the case for these plans albeit that a possible 10% abatement was available if benefits were in line with UK approved pension schemes.
We are currently unclear as to the position where someone is non-UK resident when they take a benefit and how that may be taxed (based on double tax treaties in place) and we would strongly advise participants to take personal tax advice in relation to such circumstances.
Our understanding is that UK approved share plans and non-approved share plans that fall under the employment related securities legislation are excluded from these provisions, however we would still encourage employers to clarify this with their tax advisors ahead of recommending transactions to offshore share plan trustees.
Once again we would suggest that no actions are initiated until clarity is available on the drafting and any potential exemptions have been considered.
We are in contact with all of our tax advisors and can provide updates with any new information should you be considering requesting a benefit or making any new contributions to plans.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.