Following changes made in 2013 to the ‘loans to participators’ rules, in ss455-464 CTA 2010, it has become difficult, if not impossible, for a close company to make loans to an employees’ trust without incurring a penal charge to income tax (albeit with the prospect of a repayment when the loan is repaid) at, currently, 32.5%.

If the intention is to fund the subscription of shares to be put into ‘joint share ownership’ (see Chapter 10) or held to ‘hedge’ contingent obligations to satisfy rights to acquire shares granted by the company, one alternative might be for the company to issue shares to the trust on a deferred payment basis. It is apparent from the decision of the First-Tier Tribunal in RKW Ltd v HMRC [2014] UKFTT 151 (TC) that the existence of an outstanding unfulfilled obligation to pay subscription monies at or by an agreed time is not a ‘loan or advance’ for these purposes.

A public company may not allot shares as fully or partly paid-up as to the nominal value and premium (i.e. the agreed subscription price, typically market value at the time of issue) otherwise than in cash if the consideration is or includes an undertaking to be performed more than 5 years after the date of the allotment (s587 CA 2006). Although shares may be issued partly-paid as to their nominal value, and a public company may allot shares in pursuance of an employees’ share scheme for less than the 25 per cent minimum normally payable upon an allotment of shares in a public company, the issue of shares partly-paid as to their par value (as opposed to being issued as fully-paid up as to their nominal value but with part of the consideration left outstanding) may give rise to tax complications.

In particular, whilst the fact that shares are not “restricted securities” by reason only of the fact they are partly-paid up as to their nominal value, the fact that they are not fully paid-up as to their nominal value may give rise to charges on the part of an employee who acquires an interest in the shares under Chapter 3C of Part 7, ITEPA 2003, and, if the shares are then jointly-owned with an employee, possibly also a charge under Chapter 4 (benefit received in connection with employment-related securities) if, in due course, the balance of nominal value is paid up out of the proceeds of sale of the shares (as fully-paid shares) otherwise due to the trustee co-owner.

Pett, Franklin & Co. LLP are experts in employee share schemes, share valuations and executive incentives. To find out how we can help you or your client, please call 0121 281 5798 or email enquiries@pettfranklin.com.