ERS on gift of shares to unmarried partner

Would HMRC allow ERS exemption on gift of shares to unmarried partner who is also employee?

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Hi all,

I have been looking into gifting of company shares between unmarried couples. I think I understand the situation, but I just worry about the Employment Related Securities angle.

I wondered if anyone would have any experience or insight on ERS exemptions for personal relationships, and would appreciate any thoughts you might be kind enough to spare.

As I understand it, if A decides to gift 50% of the 100 ordinary shares she owns in her small and private limited company (she owns 100% at present) to her long-term co-habiting partner B - purely because she wants to and for personal reasons - then that's all fine. 

Of course, the shares are treated as being disposed by her at market value, incurring a CGT liability. The situation also qualifies for Business Asset Disposal Relief, so CGT is at 10%. Gift-Holdover Relief can be claimed so nothing gets paid anyway (until later when B disposes of the shares). That's all good, and I'm happy with how that works and the criteria for the reliefs to apply seems well defined.

There is also IHT to consider, but that's not a big issue.

The bit I'm more concerned with is the potential for Employment Related Securities to apply. B has been a part-time employee of the company for several years. He carries out administrative work, website development, IT support, research, marketing, and occasionally some little bits of client work to help out. He keeps a time-sheet for work done and then gets paid for it every month via PAYE. He doesn't currently have any shares or other investment in the business and isn't a director. He doesn't have any other employment at present - although he does have some additional income from a couple of rental properties.

If the shares were deemed to fall under ERS, then instead of CGT the market value of the shares would be taxed under PAYE, along with NI. That would result in a far bigger tax and no hold-over relief.

As A will be gifting the shares to her unmarried partner just because she wants to, my understanding is that ITEPA 2003 421B (3) should exempt the transaction from falling under ERS. B's role in the company will not be changing in any way.

My worry is that, on reading around, it sounds like HMRC just claim to take a 'common-sense' approach to applying this exemption, and that they may potentially challenge that ERS applies in situations that they do not regard as 'common' within personal relationships. They don't give many examples of what they would consider normal - just the one obvious situation where a father gives shares in his business to his children at retirement - which seems to leave them a lot of leeway when it comes to what they consider 'common'.

ERS is obviously intended to catch income tax avoidance through giving shares to employees instead of income via PAYE, but that isn't what is happening here. Obviously, as A and B are in a domestic relationship there will potentially be a benefit of using B's dividend allowance and tax bands - which HMRC could argue is the reason for the giving of the gift - but then the company could have been (and probably should have been!) set up with both A and B as share holders in the first place and the same tax situation would apply. If HMRC are going to take that position, then surely that makes the exemption questionable for pretty much every scenario, and therefore a bit worthless...?

It's not a life changing amount of money at stake here - although enough to be significant to the client, as their combined income is fairly modest - but I'd like to get as good a handle on the ramifications as possible before spelling out the options to them.

Have any of you dealt with something similar in the past, or have any other insight into whether HMRC would be likely to challenge the ERS exemption in this kind of scenario?

Replies (10)

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By Ruddles
17th Mar 2024 13:50

Never encountered the situation in practice but would suggest that there is a solid argument for ERS not to apply.

One point, though - “ERS income tax instead of CGT” is a misconception. Quite possible for both - CGT on the transferor, ERS charge on the transferee.

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Replying to Ruddles:
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By Helpful Accountant
17th Mar 2024 18:30

Yes, good point, thank you! I had read some articles/posts from other accountants where they seemed to be talking as if it was either CGT or ERS, not both, which misled me.

Now that you say otherwise, I can see how the CGT would be independent of the ERS.

Person A has a gain in the share value (CGT) from when she acquired the shares (the formation of the company) which gives rise to the value of what she wants to gift.

Then the value of the gift itself could potentially fall under ERS and be taxed as income for person B.

Two separate things, tax wise.

Interestingly, I saw that it seems that if Income Tax through ERS is incurred by the employee then it might be possible to claim back Corporation Tax paid/due by the company via a deduction of the amount taxed under ERS via CTA 2009 1006 through 1013. If this is true - and some superficial research looks promising - then for this particular case that would take some of the sting out of the ERS hit.

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By More unearned luck
17th Mar 2024 16:01

"My worry is that, on reading around, it sounds like HMRC just claim to take a 'common-sense' approach to applying this exemption, and that they may potentially challenge that ERS applies in situations that they do not regard as 'common' within personal relationships."

Common sense is so called because it is common (ie a lot of people have it). A common practice is so called because it is common (ie a lot of people do it).

There is no relationship between how common a practice is and the extent to which it is a common sense thing to do. For example long-term couples living together without marrying is common but lacks common sense.

Just "because she wants to" isn't the criterion for exemption. You need to examine her motives. To quote HMRC "The principal question to be asked is whether an employer is trying to reward or provide an incentive to an employee in passing over such shares to him/her, or whether the reason is more personal than an employer/employee relationship."

The best tax advice is to marry then gift.

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Replying to More unearned luck:
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By FactChecker
17th Mar 2024 16:12

Beat me to it ... in particular the "principal question" extract.

Also the size of OP's client company isn't mentioned, but it sounds likely to be small and more importantly not publicly traded ... so phrases in HMRC guidance like "If you acquire securities from your employment and the price you paid for them was less than they were worth at that time, you will be taxed on the difference between the two amounts" raise the question of 'worth'.

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Replying to More unearned luck:
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By More unearned luck
18th Mar 2024 18:06

The word the law uses is not 'common' but 'normal', as in "in the normal course of..".

I think that by common sense HMRC mean that 'normal' does not require a need for a pattern to the giving and that one-off gifts can qualify (unlike in the normal-expenditure-out-of-income IHT exemption). Possibly it doesn't matter if it an unusual thing to do (I suspect that gifts between unmarried couples is rarer than between married couples because of the lack of CGT relief).

I repeat; tie the knot first. No CGT and defiantly a normal thing to do (a wedding prez?).

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Replying to More unearned luck:
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By Helpful Accountant
21st Mar 2024 12:17

Yes, I think my nagging doubt has been that HMRC will challenge on the basis of 'why are you doing this now'?

The company is very small - just two employees, the owner and her partner, and it provides services that only the owner is qualified for.

Without a very good personal reason for giving the gift - and I can't think of a solid one for this specific situation - then HMRC will be suspicious it is being done solely for tax avoidance purposes.

I will float the marriage idea, but I don't think they are keen on going down that route.

Thank you all for the constructive input.

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Replying to Helpful Accountant:
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By Bobbo
21st Mar 2024 12:37

Helpful Accountant wrote:

I will float the marriage idea, but I don't think they are keen on going down that route.

Not the most romantic proposal story "my accountant recommended it" lol

Perhaps your client has some form of moral objection to marriage but I'm not sure i'd find myself wanting to *give* half my company to someone I wasn't wanting to marry.

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Replying to Helpful Accountant:
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By FactChecker
21st Mar 2024 16:12

The bit that's missing here is not the hypothesising over how HMRC may interpret the gift, but what objectives/reasons are in the donor's mind (and then preferably expressly written down).
"purely because she wants to and for personal reasons" is not not only woolly beyond belief, but would provide no protection against any other interpretation made by HMRC.

I'm not suggesting those reasons should be published here - just that they should be clear and unambiguous in case they are questioned later (not only by HMRC but possibly by the donor if the relationship falters).

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By Tax Dragon
21st Mar 2024 20:08

I don't understand the marriage proposal. Getting married of course has many tax effects, providing many advantages and disadvantages [and of course if you're going to advise this, you need to cover these off... which actually won't be easy to do], but how is whether a couple is married relevant to s421B?

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Replying to Tax Dragon:
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By More unearned luck
25th Mar 2024 17:43

It isn't. It merely helps to allay the OP's doubt. And it eliminates the client's capital gain.

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