UK: Disguised Remuneration – Employee Trusts

Last Updated: 17 May 2011
Article by Nicholas Stretch, Tair Hussain and Isabel Pooley

Helpful amendments have been published by the Government. These address many of the concerns raised where employee trusts used for employee share schemes come into contact with the new rules on "disguised remuneration". They are due to be debated in Parliament today.

Although there are still some areas of difficulty, these amendments (together with some expected HM Revenue & Customs ("HMRC") guidance in the form of answers to FAQs) should mean that most quoted companies should not have to change their pre-existing practice of making, hedging and satisfying employee share plan awards through employee trusts. The publication of final amendments comes after several months of lobbying on the relevant issues.

HM Revenue & Customs has not yet updated its FAQs, but is expected to do so in due course.

While the Finance Bill is not anticipated to become law until mid-July 2011, the disguised remuneration legislation is backdated to 6 April 2011 or in some cases 9 December 2010.

Disguised remuneration and "earmarking"

Under the disguised remuneration rules, an upfront income tax and National Insurance contributions ("NICs") charge may arise if a third party (principally an employee benefit trust) "earmarks" cash or other assets (including shares) for an employee with a view to taking a later step (e.g. transferring the shares to the employee). It may also arise in other cases.

While this legislation was not aimed at employee share plans (it was principally targeted at remuneration schemes such as family benefit trusts, loans and certain pension arrangements) they are caught by the disguised remuneration legislation as it captures an employee trust granting, or agreeing to satisfy, share options or other share-based awards to named employees, or taking action in relation to those awards (e.g. buying shares for that purpose).

Employee share plan exemptions

Even when the original legislation was published in December last year, there were a large number of exemptions. These were expanded further in the draft legislation provided after the April budget, but still not sufficiently and companies and trustees were understandably nervous about operating arrangements without a satisfactory position being reached. However, the amendments published last week now finally appear to provide a workable exemption regime for employee share plans.

Broadly, earmarking in advance of a proposed award or in connection with an existing award should not now be a problem, provided that:

  • the maximum period over which a share award or share option can vest or be exercised is ten years. This should not be a problem for most quoted companies as it reflects existing practice (the previous draft legislation had a limit of five years, which would have caused concerns);
  • the terms of the award or option provide that it will lapse if specified conditions (e.g. performance conditions or continuing employment) are not met on or before the vesting date and there is a reasonable chance when the award is granted that the award will lapse. The award may also provide for partial lapse. Further guidance is awaited on what HMRC considers to be a "reasonable chance". The exemption will still be available where employees are able to receive their shares early if they leave or the company is sold and in other events, although further guidance is awaited on this;
  • the employee will be subject to income tax and NICs on or before the vesting or exercise (or would be but for a relief);
  • there is no tax avoidance motive; and
  • the number of shares earmarked must not be more than the maximum number reasonably required.

A helpful change made in the most recent draft is that awards may be made by any person – the April draft required awards to be made by the actual employer (rather than the parent company or an employee trust) which appeared very restrictive.

An employee trust may also make cash awards, although on much more restrictive terms.

There are still a number of areas where we understand that HMRC will fill in missing gaps through providing answers to FAQs. These include references in the legislation to determining whether there are sufficient shares being required to be done on a scheme by scheme (or even award by award) basis, whereas in practice employee trusts are funded looking at all commitments as a whole. However, we hope that HMRC will only in practice apply this legislation where there is tax avoidance and take a reasonably broad view and accept a company's own view of its hedging requirements. Similarly, the legislation can still currently be read as requiring shares which have been allocated to meet an employee's award having to be sold to the extent not used to satisfy that award, but, again, we hope that HMRC will not enforce such an impractical reading.

Companies which only issue shares to satisfy awards

If shares will always be issued to meet awards (rather than provided from an employee trust) then the disguised remuneration legislation is not a concern as there is no relevant third party.

Cashless exercise arrangements

Most employees now exercise options on a cashless exercise basis and direct that the exercise price, income tax and NICs arising on exercise is funded by selling the shares they receive rather than providing a cheque upfront.

The problem here is that the transfer of an asset (including shares) can be a chargeable event under the disguised remuneration legislation. If an employee pays in full, then this provides a complete exemption, but frequently the employee pays shortly after the transfer rather than before. This was a problem with the previous drafts of the legislation, but seems now to have fallen away as an issue because payment can now be made at or around the time of transfer which gives sufficient time for shares to be sold and provide the necessary cash.

Where an express loan is provided (which is rare) the legislation has been amended so that a charge will not now arise if the employee reimburses the employee trust within forty days of the date of exercise of the option or making of the loan.

In other cases where an employee acquires shares from an employee trust at below market value, however, there would be an upfront income tax and NIC charge on what has not been paid over. Where possible, therefore, partly-paid share schemes should be structured through a company issuing shares.


The amendments to the draft legislation are good news for employee share plans, although further guidance is still awaited in some areas.

However, in almost all cases, the net result after some months of uncertainty is that it is business as usual.

For a copy of the proposed amendments please click here.

For more background on the disguised remuneration legislation, please see our Law-Nows:

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 17/05/2011.

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