United Kingdom


  • Service: Tax, Employee Issues
  • Type: Business and industry issue
  • Date: 16/02/2011

Disguised Remuneration 


Implications for employee sub-trusts or ‘family benefit trusts’

A number of companies use employee sub-trusts – sometimes called ‘family benefit trusts’ – for the purposes of operating their share plans. This involves allocating shares to a sub-trust for the benefit of an employee and his family on the grant or vesting of a share award, instead of granting the award to the individual employee. These arrangements will in most cases now fall foul of the draft legislation on ‘disguised remuneration’.


Prior to the publication of the ‘disguised remuneration’ rules on 9 December 2010, these arrangements worked by shares in the employing company (or another group company) being contributed to an employee benefit trust (EBT). The trustees of the EBT were then asked to allocate shares to sub-trusts for specific employees and their families as a tax efficient alternative to granting awards to the employee.

The arrangements were typically structured in one of two ways:

  • In some cases, the shares were allocated to the sub-trust upfront, but on terms that the shares would be revoked to the main EBT if time-based vesting and/or performance conditions were not met.
  • In other cases, the shares were retained within the main EBT on the basis that the trustee would be asked to allocate them to the relevant employee’s sub-trust if time-based vesting and/or performance conditions were met.

Provided that such arrangements were appropriately structured, no income tax or NIC was triggered until the shares (or cash proceeds) were distributed to an employee. Certain other benefits (e.g. interest free loans) could be taken by the employee and family members from the EBT while only attracting a low tax charge.

Disguised remuneration rules

Additional income tax and NIC charges are likely to apply to such arrangements under these new rules. Where a contribution is made to the main EBT, or an allocation made to a sub-trust, for specific named employees after 5 April 2011, income tax and NIC is likely to be due on the contribution or allocation date.

If the shares are sold and the sale proceeds loaned to employees or other beneficiaries on or after 9 December 2010, the loan benefit is likely to be taxed as a bonus on 6 April 2012 unless the loan is repaid beforehand. Certain other fundamental changes to the terms of existing loans may also be taxed in the same way.

Other ‘earmarkings’ of sale proceeds, potentially including switching out of company shares into other investments, and in some cases the receipt of dividends, are also potentially caught from 6 April 2011. The range of benefits that can be provided tax efficiently from these arrangements is also seriously curtailed.


Alternative approaches


Employers who have implemented such arrangements may wish to consider the following possible alternative approaches:

  • Where further contributions are due to be made, can those contributions be made before 6 April 2011? It may then be possible to draft any vesting conditions so that no earmarking or other ‘relevant step’ is required on the vesting of the shares.
  • Conversely, other employers and beneficiaries may wish to consider asking the trustee to distribute shares (rather than the cash proceeds from the sale of shares) if this would maximise statutory corporation tax relief for those share-based awards.
  • Employers who do not wish to make further contributions of shares to EBTs may consider granting employees nil cost options or equivalent forms of award which give the employee the choice of when to acquire the shares and suffer tax and NIC.
  • Employers who still have the headroom to do so are likely to want to consider how they can make best use of HMRC approved CSOPs and EMI options. Others will want to consider other tax efficient share plans like joint share ownership plans (JSOPs).


Replacement share plans need, of course, to be considered in a much wider context, taking proper account of commercial and shareholder considerations as well as employer and employee tax efficiency.


Other implications


This note only considers the possible implications of the disguised remuneration rules for share plans operated through employee sub-trust arrangements.


The new rules also potentially impact other share plans which make use of EBTs, e.g. to provide a warehouse or exit for company shares. In this latter case, we anticipate changes to the draft legislation or HMRC guidance mitigating the effect of the new rules.


However, all companies operating share plans with EBTs – or who use EBTs to provide other benefits to their employees – will want, as a minimum, to review those arrangements to confirm whether or not the new rules could apply.


How We Can Help

KPMG’s specialist Employee Incentives team can help you understand exactly what the impact will be, what actions can be taken within the current tax year (ie before 6 April), how to manage the Trust thereafter, and what alternatives might be available from 2011/12 onwards.

The good news is there is still time to review the options and take action. Call Chris Page on 0207 311 3319 or email chris.page@kpmg.co.uk and KPMG can start helping you get your Trust ready.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


Chris Page


Chris Page


Associate Partner

0207 311 3319 |





Chris Page
0207 311 3319


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