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Tax liability on pymt to family (death in service)

Tax implications on company and family in respect of a “gift” for death in service payment

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My father in law passed away suddenly, his ex-employer had a verbal agreement with him that upon his retirement he would be paid 5% of the value of the company. The ex-employer wishes to honour that agreement and pay this sum to his surviving children. There is some confusion though how both the company and the children deal with the tax implications rising from this. My understanding is that it should be a tax deductible expense to the company and any tax arising on the sum will be payable by the children based on their relevant tax banding. Could someone please advise if they see it any differently? The sum involved is approx. 220K and our feeling is this would be paid to one child as the executor who would then draw up a deed of distribution when paying out the sums equally to the other 3 children (all adults)

any help would be greatly appreciated 

thank you 

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By WhichTyler
16th May 2021 11:25

This needs a lawyer (or two) and more detail.

Is the company paying the gift to the children, or is the company owner paying it personally?
If there is a formal agreement, is there a debt to the deceased's estate that is then subject to IHT (or even in come tax) and distributed in accordance with the will?
Is there a shareholders or directors agreement in place?

If it is a voluntary gift from company to individuals (the children) then it may not be deductible for tax purposes in the company, but perhap not taxable on the children (as it is unearned)...

Etc etc

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Replying to WhichTyler:
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By Davidmews
16th May 2021 12:49

Thank you for your response

It is to be treated as a payment from the company, not a personal payment from the owner. Nothing formal in writing only a verbally implied gentlemen’s agreement. No shareholders or directors agreement in place.

It is a voluntary payment from the company to the surviving children. We originally thought it could be treated as a death in service payment and be tax exempt but due to the “verbal” agreement and it being an implied liability then we believe tax liability will fall on the individual children.

We are stuck in limbo at the moment as the owner of the company is reluctant to make any payment without knowing the tax implications which his own accountant has had a year to work out but is yet to come up with an answer!

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By David Ex
16th May 2021 11:24

It sounds like an unfunded unapproved retirement-benefit scheme.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim150...

I personally wouldn’t enter into a £220,000 transaction without taking professional advice about the tax (and legal?) issues but then I’m naturally cautious and it’s a lot of money to me.

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Replying to David Ex:
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By Davidmews
16th May 2021 13:00

Thank you. I have contacted HMRC on the matter but they can take up to 28 days to respond. It always confuses me when I try to follow their examples as each step leads to another 3 or 4 steps it seems!

The amount in question including the value of the rest of the estate is below the IHT limit so we know there is nothing to do in relation to that. We just want to be able to show the owner clearly what the tax treatment should be and remove any doubt.

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By Matrix
16th May 2021 13:14

That is a lot of money to me too so I would not take advice from either HMRC or an Internet forum.

If I was advising the employer then I would assume the payment was subject to income tax if the issue of shares arises as a result of the employment. No idea about the death in service, timing etc., so further analysis would be required based on the facts.

OP - if you really want to move this forward then offer to get some third party advice and determine who will pay for it.

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By paul.benny
17th May 2021 08:57

You casually use phrases like "verbal agreement" and "implied agreement" when I think you simply mean there was an unwritten understanding between the parties. (ask yourself whether the estate would have been able to enforce this arrangement if the owner had declined to pay up).

You don't say whether you are acting for any of the parties or indeed are one of the parties. I would suggest that the primary onus is on the payer to ensure they account for the payment correctly and then deal with the associated tax. Since the arrangement was undocumented, there may be some latitude to create some facts ex post having first determined the tax treatment in each case.

As has already been said, this requires paid-for advice that can take account of the full facts.

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