Tax on gift to ex employee

Empoyee with 45 years service retires, employer wishes to give her £100,000 gift.

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The owner of a successful family owned limited company wishes to make an ex-gracia payment of £100,000 to an employee who is retiring shortly at age 70 after 45 years service. I know the intention is that the recipient should receive £100,000. The obvious thing to do is to gross it up and include it in the final month's salary, at a large additional cost to the company. Is there a less obvious option? The company would be quite prepared not to claim the cost as a tax allowable expense. If a gift were made after the employee has left the company or even a loan, would that be tax free in the hands of the ex employee? Any ideas would be much appreciated as I have been tasked to "do the best you can" when the tax implications were raised.

 

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paddle steamer
By DJKL
11th Nov 2020 11:02

Pension contributions may be a useful avenue to consider.

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Replying to DJKL:
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By rakboy
11th Nov 2020 11:14

Thanks. Tax relief for employer, 25% tax free for employee. However she already is taking both private (very small) and state pensions. She has a £100,000 mortgage. I don't think the amount of gift was a coincidence.

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Replying to rakboy:
paddle steamer
By DJKL
11th Nov 2020 11:54

So possibly depends what type of pension scheme accessed (I think we can ignore state one) and how accessed to determine maximum annual contribution now possible- if you could perm 2 x£40k from the employer and maybe a redundancy payment (though is the role redundant????) that might be efficient and might , if pension drawn carefully over 2-3 years, conserve personal allowance and keep within basic rate.

(Not sure re your redundancy age limit comment, not my area but see linked article)

https://www.hl.co.uk/news/articles/can-i-still-contribute-to-a-pension-a...

https://www.reculversolicitors.co.uk/redundancy-and-retirement-age/

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By Tax Dragon
11th Nov 2020 11:26

Income tax: it's likely taxable under Pt6 Ch2 of ITEPA. (See mention of 'lump sums' in s393B(1).)

I'll leave someone else to comment on NIC.

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By bettybobbymeggie
11th Nov 2020 11:39

Redundancy?

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Replying to bettybobbymeggie:
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By rakboy
11th Nov 2020 11:43

Too old. I don't believe that you can make a tax free redundancy payment, maybe any redundancy payment, to someone past state retirement age. Happy to be proved wrong though.

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paddle steamer
By DJKL
11th Nov 2020 11:55
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By OldParkAcct
11th Nov 2020 12:18

Perhaps a combination of a tax free redundancy payment and the balance as a loan?
The loan could be "repaid" via the company making annual payments to the retired employee as an unfunded pension, with BR tax deducted.

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Replying to OldParkAcct:
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By Paul Crowley
11th Nov 2020 20:11

I would vote for this as best workable solution

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Psycho
By Wilson Philips
11th Nov 2020 22:24

Redundancy?

“an employee who is retiring shortly at age 70 after 45 years service”

She is either being made redundant or she is not. I turn my nose up at those suggesting that it be called redundancy just to [try to] make the tax work.

[Edited in light of TD’s comment below]

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Replying to Wilson Philips:
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By Tax Dragon
11th Nov 2020 22:17

I'm not persuaded that it does make the tax work. Pt6 Ch2 is engaged as noted previously. So Ch3, which includes the £30,000 so-called 'exemption', does not apply - see s401(3).

I'm still leaving it to others to comment on NIC. And indeed deductibility.

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By normanwl
13th Nov 2020 17:02

You may have this all wrong. What are the circumstances of the desire for the gift? You say the owner of the business wishes it.

If the owner wishes to give it personally then if the survive 7 years it is not an issue provided the gift is not out of the range of what might be possible from their own wealth.

Are there directors loan accounts that are positive that could be drawn down. Are there other distributable reserves such as share premium accounts?

These may already have been considered of course.

One last thing I had a client who was let with an unsackable employee i.e. their dear departed fathers mistress. Are there other factors involved. I am not sure what happens with payoffs for non disclosure agreements. I hope this is not the case but it happens.

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Replying to normanwl:
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By rakboy
13th Nov 2020 17:24

Ha! There are certainly not other factors involved. The employee has worked diligently and loyally for over 45 years, but the time has come to close her typewriter. She still has a mortgage and the company owner who does not have a director's current account in credit, wishes to make an ex gracia payment so her retirement can commence without the mortgage hanging over her.

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By unearned luck
14th Nov 2020 14:24

There seems to be a dearth of footie fans among Aweb members as no one has mentioned Moore v Griffiths and Hurst v Griffiths.

OP: you should question your client closely as to why this payment is being made. Is it a reward for services rendered or is made for another reason such as a mark of personal esteem or appreciation?

Hurst called his autobiography 1966 And All That. This play on words has proved so irresistible that Craig Brown, an art gallery and Half Man Half Biscuit have all been unable to resist.

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Replying to unearned luck:
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By Tax Dragon
15th Nov 2020 16:04

Could it be that no-one had mentioned them because they're not relevant? (Or, if they are, you couldn't perhaps make the connection a little clearer for me? Much as I love Justin and want to have his babies, I don't want everyone else to become mini-Justins and cite cases with little apparent relevance and less explanation!)

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