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£30k tax free on termination

£30k tax free on termination

An employee (or director) can be paid up to £30,000 on termination provided this payment is not contractual.

There is nothing in the service contract relating to termination payments but the company is being sold and there is a clause in the heads of agreement that the price will be reduced by £30,000 (x number of director/shareholders) in relation to termination payments made to them.

The heads of agreement is not a contact so as long as this does not appear in the purchase and sale agreement I guess it is OK

Any thoughts?


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28th May 2012 22:48

Related to duties performed?

The £30,000 exemption only applies to sums that are not treated as remuneration under the ITEPA under any other provision, hence if considered to be a reward for duties performed in the past they exemption will not apply.  I'd suggest that this issue is taken up with the revenue before any payment is made and guidance sought - the worrying aspect is the term director/shareholders because this would seem to imply that it may be related to duties performed rather than loss of offiuce or employment.

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29th May 2012 11:31


I agree with Paul.

If you did manage to get it inside S.401 though, I think the Heads of Agreement gives HMRC scope to attack the payment as a transaction in securities.  The sale price is being varied downwards by the tax-free cash being received, making a clear link with the payments and the subsequent share sale. It's also relevant consideration conferring an income tax advantage that doesn't (of itself) result in a fundamental change in ownership.

Don't be greedy pay 10% CGT on it.

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29th May 2012 12:34

Good point George

Good point about transactions in securities - and the revenue have been much more active in pursuing that point in recent years.  Simple sale - CGT at 10% on £30,000 is a cost of £3,000 whereas the liability as remuneration is £12,000 + NIC and as a transaction in securities £12,000 plus an enormous amount of hassle.  I think you would need clearance on the transaction point which would alert the revenue anyway.

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By blok
29th May 2012 13:01




I have seen it where people try and turn income into capital by turning what would be income into capital say by accepting a reduced contractual notice period payment in return for larger CGT proceeds being applied.

If buyer and seller have negotiated a reduction on a £ for £ basis on the value of the shares because of an employee termination payment I don't see how HMRC could attack the £30k as subject to cgt if buyer and seller are not connected. 

As a seller I will wish to deduct the £30k for unprovided for liabilities.  Think about a dividend pre sale which is still income in the hands of the recipient.

The question of whether the £30k is taxable or not I couldn't say for sure but that point should IMO be separated from the value of the cgt consideration if the price is commercialy negotiated.


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29th May 2012 13:26


I'm not saying the £30Ks are part of the CGT consideration. The TiS charge is to Income Tax

I'm saying that the sellers (to a large extent independent of the purchasers) are structuring the way they receive what is effectively the sale proceeds such that income tax is avoided on £30K per shareholder.

"Transaction in securities means a transaction of whatever description relating to securities." The Heads of Agreement shows a relationship.

There must be "relevant consideration" in connection with "the application of assets of a close company in discharge of liabilities". And relevant consideration is "consideration which is or represents assets which are available for distribution as a dividend, or would be apart from anything done by the company".

There needs to be an income tax advantage: "income tax would be payable by the person in respect of the relevant consideration if it constituted a qualifying distribution and no capital gains tax is payable in respect of it".

A TiS won't arise though if there's a fundamental change in ownership as a result of the transaction.

I'm saying that the Heads of Agreement makes sufficient connection between the share sale and the "termination" payments for it to constitute a "transaction in securities", and the legislation does the rest to bring about an Income Tax charge.

My suspicion would be though that Paul is right and HMRC would argue (and probably win the argument) that it's earning within S.62 ITEPA and so not within S.401.

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By blok
29th May 2012 14:20


sorry, off at tangent.

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