Consideration is not mentioned in ss14 and 15 IHTA. Does it vitiate a waiver? Consideration for a waiver of remuneration of course may be taxable as employment income if paid by the employer or by a “related person” under Part 7A ITEPA 2003, so doubtless ill-advised.
Jack Harper
Hello Jack. I think it would be helpful if you could give some context as to what the remuneration and consideration you were thinking of.
Putting the “repayment” bit of s14 aside, I can’t really think of any waivers of remuneration that would be within s14. Most waivers are not transfers of value. And those that are (e.g. giving up an employment-related securities of option or giving up the right to receive carry) would not be have been “earnings” or “treated as earnings”. I don’t know if you have considered that last point but this started to be an issue when Schedule E without a case disappeared in the 2003 rewrite. As I am sure you have spotted, the EIM states that a waiver of remuneration happens when an employee gives up rights to remuneration and gets nothing in return. But thats just an introductory paragraph in the EIM that is only relevant to IHTA if it reflects the ordinary meaning of the words. And I am not clear it does.
I am trying to solicit opinion on the IHT point: given that disclaimers for consideration are specifically outlawed by ss 93 and 142 IHTA why is it not also the same for these waivers?
I am doubting the received wisdom that receiving consideration constitutes acceptance. I do this on the basis of being unable to unearth any legal authority. A waiver is only effective if it takes effect before the income becomes an intangible property right. Again, I know of no authority but it occurs to me that a judge might view a waiver as analogous to if not actually an actual species of disclaimer and so capable of being vitiated by acceptance. So: is consideration acceptance?
I can’t settle for a non-legal justification like Trump’s “everybody knows” or my wife’s “if you don’t know I’m not going to tell you”. I tried to add this point to another thread but it was rejected for being my third consecutive post, presumably by an algorithm and not MI5.
I mentioned the employment income point to avoid someone pointing it out. Whatever the technical niceties, giving consideration for a waiver of remuneration and expecting it to be income tax-free evinces the same insanity as creating a non- repayable loan with the same forlorn indeed potentially incriminating hope. The floodgates paranoia of the Finanzpolitzei would soon explode around one who thought they had experienced a tax avoidance Eureka moment.
The technical niceties and less official terror would seem to attend a waiver of a dividend for consideration; or a waiver of interest which the IHTA does not even dignify with its own section. I doubt consideration paid by the company or the lender would escape counteraction but if paid by any other person it might be different. But that aside, does it make the waiver ineffective in law?
Jack Harper
I wonder if the point is this:
With a disclaimer, effectively person A is transferring value (to which they are currently entitled) to some other person. Person A is saying “I don’t want that gift” and the gift goes back to the donor. If the disclaimer returns the gift to an estate / trust, the terms of the estate / trust will dictate who then receives that gift, but person A is not treated as having made a gift to that other person. Person A just wants nothing to do with the gift.
ss93 and 142 IHTA provide that that works for IHT purposes in that situation, but IHT is still paid (in respect of the estate / trust) on account of the gift then going to someone else.
Let’s say the gift is a cash legacy of £100,000 and that it is person B who receives the legacy as a result of the disclaimer.
If, as consideration for the disclaimer, person B were to give person A £100,000, then B might say that he has not made a “transfer of value”, because he has received the right to the legacy (£100,000 - as a result of the disclaimer) in return for his payment to A of £100,000. B’s estate has not changed in value. The only incident of IHT would be the £100,000 received by B. But the receipt by A of the £100,000 consideration is not subject to IHT. If B happened to be the spouse of the deceased, and A was the deceased’s son, then there would be no IHT payable at all - spouse exemption on the death “because of s142”, but no IHT on the transfer of £100,000 from surviving spouse (B) to A because A says that A has not made a “transfer of value”. Looking at it in the round, A’s estate is still increased by £100,000 but B’s has not changed.
Hence s142 does not apply where consideration is given. This ensures that there will still be an incident of IHT in respect of what A originally received.
Looking instead at s14, the position seems to be to do with tax on income/profits. Either the employee pays income tax on the sum paid and the business doesn’t (the payment of the remuneration is deductible for the business’s tax purposes) or the employee doesn’t receive the remuneration (by disclaimer) and the business can’t deduct the remuneration (and pays corporation tax on it). Either way, tax gets paid on this bit of the business’s revenue. The disclaimer can be ignored for IHT purposes because income tax / corporation is still being paid one way or another.
However, if the company still deducts the remuneration paid and doesn’t pay corporation tax on that amount, then the disclaimer is to be treated as a transfer of value (a gift) by the employee to the business (which might well be a chargeable transfer).
We can all probably think of reasons why an employee might want to disclaim a payment from a business. For example, if the business owner commits some awful crime and the employee does not want to receive (or be seen to receive) anything from that business. Other reasons do spring to mind.
As for dividends, the reasoning is a bit less clear. Dividend waivers are more typically a feature where one shareholder would rather another shareholder (for example in a family investment company) received more dividends instead. Beware Settlements Legislation, though. If a UK company, the profits of the company are already taxed within the company (if a UK company) either way and will also still be available for being distributed and potentially subject to income tax in the hands of the other shareholders who do receive the dividends. I suppose, also, that the waiver re dividends (s15 IHTA) is before the individual actually has any definite right to a specific sum by way of dividend so cannot be sure that they are going to receive anything anyway. It cannot be a “perpetual” disclaimer - it has to be made within 12 months prior to the dividend accruing. It does seem, though, to be a mechanism for a wealthy family member (for example) to have more income accrue to a less wealth family member who holds the same class of shares in the same family investment company.
Paul Davidoff
I have no experience on s15 (sorry, I know you don’t like posts like that).
The predecessor to section 14 was introduced when the government had a pay restraint policy. There was concern that waiving, say, future commission would create a capital transfer tax liability on the gross amounts surrendered.
In response, the Chancellor said that Inland Revenue would ignore this point (i.e. not claim capital transfer tax liability in respect of a waiver of remuneration). He then amended the legislation (with, what is now, s14). As consideration is just not relevant for giving up cash pay, I assume Parliamentary counsel was not instructed to consider it.
I have not gone back to Hansard but the waiver clause must have been discussed because, I think, it was amended in committee. If you want more background, give it a read. But I guess you won’t find anything on the consideration point - although that’s me speculating.
It’s informed speculation though as I cannot think of a sensible real world example from the 1970s where consideration would have been given in respect of forgone remuneration.
I’m not sure about: “A waiver is only effective if it takes effect before the income becomes an intangible property right”. While that might be right with cash pay, I could imagine a company gaining a new investor and, to facilitate their investment, the CEO waives her right to exercise her share option until, say, an exit.
As you say, any consideration given on the waiver of remuneration would be taxable as employment income tax (albeit this would normally be as earnings rather Part 7A) so there is no “clever” scheme here. There are plenty of dodgy schemes out there that take a different view: Current list of named tax avoidance schemes, promoters, enablers and suppliers - GOV.UK
I am no wiser as to why consideration is prohibited in ss 93 and 142, where I can readily see its contextual rationale, BUT not under ss 14 or 15 and why a waiver of interest gets no mention at all. Once the item has become incorporeal property (traditionally, a chose in action) it is assignable and a disclaimer for IHT is then too late because of s3(3). An omission is not caught for CGT, the settlements legislation. or SDLT; nor is a disclaimer. If consideration is acceptance why mention it at all in ss 93 and 142: if that is correct law all disclaimers for consideration are ineffective. And all waivers for consideration. I am with my learned friend Mr Victor Meldrew on this issue to date.
I am still hoping for cited authority that consideration is acceptance. Paul Saunders is aware that an estate’s meeting the costs of executing a disclaimer has been held to be acceptance.
HMRC has apparently made up the stuff in TSEM4225. They cite no authority. I accept that this will rightly terrify everyone (and their insurers) into swallowing this as holy writ and plainly no client should take it on without assessing the risks. The only limit I suggest is that the total dividend part of which is waived should not exceed total distributable profits. This is HMRC psychopathology at work in the form of wishful thinking. They don’t like the outcome, so they create an interpretation of the law which outlaws it. Post hoc, propter hoc. A waiver of a dividend has the consequence of the maker not ever becoming entitled to something; the consequence is that the company “provides” something to someone else not that he or she does. This is HMRC intellectual dishonesty. If 2 apples are on a table and I choose not to take one, the result is that you can take both. To assert that I have “indirectly provided” the extra apple is a distortion of language. To provide something means to reduce my own resources to benefit another, not to fail or choose not to add to them. I cannot provide anything that or out of that I have never owned.
Jack Harper
| pddavidoff Paul Davidoff
15 May |
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I wonder if the point is this:
With a disclaimer, effectively person A is transferring value (to which they are currently entitled) to some other person. Person A is saying “I don’t want that gift” and the gift goes back to the donor. If the disclaimer returns the gift to an estate / trust, the terms of the estate / trust will dictate who then receives that gift, but person A is not treated as having made a gift to that other person. Person A just wants nothing to do with the gift.
ss93 and 142 IHTA provide that that works for IHT purposes in that situation, but IHT is still paid (in respect of the estate / trust) on account of the gift then going to someone else.
Let’s say the gift is a cash legacy of £100,000 and that it is person B who receives the legacy as a result of the disclaimer.
If, as consideration for the disclaimer, person B were to give person A £100,000, then B might say that he has not made a “transfer of value”, because he has received the right to the legacy (£100,000 - as a result of the disclaimer) in return for his payment to A of £100,000. B’s estate has not changed in value. The only incident of IHT would be the £100,000 received by B. But the receipt by A of the £100,000 consideration is not subject to IHT. If B happened to be the spouse of the deceased, and A was the deceased’s son, then there would be no IHT payable at all - spouse exemption on the death “because of s142”, but no IHT on the transfer of £100,000 from surviving spouse (B) to A because A says that A has not made a “transfer of value”. Looking at it in the round, A’s estate is still increased by £100,000 but B’s has not changed.
Hence s142 does not apply where consideration is given. This ensures that there will still be an incident of IHT in respect of what A originally received.
Looking instead at s14, the position seems to be to do with tax on income/profits. Either the employee pays income tax on the sum paid and the business doesn’t (the payment of the remuneration is deductible for the business’s tax purposes) or the employee doesn’t receive the remuneration (by disclaimer) and the business can’t deduct the remuneration (and pays corporation tax on it). Either way, tax gets paid on this bit of the business’s revenue. The disclaimer can be ignored for IHT purposes because income tax / corporation is still being paid one way or another.
However, if the company still deducts the remuneration paid and doesn’t pay corporation tax on that amount, then the disclaimer is to be treated as a transfer of value (a gift) by the employee to the business (which might well be a chargeable transfer).
We can all probably think of reasons why an employee might want to disclaim a payment from a business. For example, if the business owner commits some awful crime and the employee does not want to receive (or be seen to receive) anything from that business. Other reasons do spring to mind.
As for dividends, the reasoning is a bit less clear. Dividend waivers are more typically a feature where one shareholder would rather another shareholder (for example in a family investment company) received more dividends instead. Beware Settlements Legislation, though. If a UK company, the profits of the company are already taxed within the company (if a UK company) either way and will also still be available for being distributed and potentially subject to income tax in the hands of the other shareholders who do receive the dividends. I suppose, also, that the waiver re dividends (s15 IHTA) is before the individual actually has any definite right to a specific sum by way of dividend so cannot be sure that they are going to receive anything anyway. It cannot be a “perpetual” disclaimer - it has to be made within 12 months prior to the dividend accruing. It does seem, though, to be a mechanism for a wealthy family member (for example) to have more income accrue to a less wealth family member who holds the same class of shares in the same family investment company.
Paul Davidoff
Thank you Tigger for the reminder to look at Hansard. Parliamentary scrutiny of Finance Acts is sometimes very illuminating, but sometimes the opposite and often without rhyme or reason for the distinction. Judges are now finding more reasons to look at extraneous materials when they should not, save for Pepper v Hart and Treaties, as a feature of their instinctively knowing better than anyone else.
My view of ss14 and 15 is that they are complete nonsense.
There is no time limit in s 14 but an arbitrary 12 months in s15. There is only one time limit in law: before the right to be disclaimed/waived comes into legal existence. It is possible to assign a future right to property but it takes effect only as a contract to assign and so must be for consideration or under seal. It is a legal nonsense to attempt to disclaim future property even under seal; the critical significance of which is that the person doing so is not bound and can retract.
I must congratulate you on the judicious spelling in context of the word forgone. This is frequently used by the modern illiterates as foregone especially by those of them whose garden gates must apparently be made out of wreaked iron. Perhaps they are just overwreaked.
Jack Harper
| Tigs Tigger
15 May |
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I have no experience on s15 (sorry, I know you don’t like posts like that).
The predecessor to section 14 was introduced when the government had a pay restraint policy. There was concern that waiving, say, future commission would create a capital transfer tax liability on the gross amounts surrendered.
In response, the Chancellor said that Inland Revenue would ignore this point (i.e. not claim capital transfer tax liability in respect of a waiver of remuneration). He then amended the legislation (with, what is now, s14). As consideration is just not relevant for giving up cash pay, I assume Parliamentary counsel was not instructed to consider it.
I have not gone back to Hansard but the waiver clause must have been discussed because, I think, it was amended in committee. If you want more background, give it a read. But I guess you won’t find anything on the consideration point - although that’s me speculating.
It’s informed speculation though as I cannot think of a sensible real world example from the 1970s where consideration would have been given in respect of forgone remuneration.
I’m not sure about: “A waiver is only effective if it takes effect before the income becomes an intangible property right”. While that might be right with cash pay, I could imagine a company gaining a new investor and, to facilitate their investment, the CEO waives her right to exercise her share option until, say, an exit.
As you say, any consideration given on the waiver of remuneration would be taxable as employment income tax (albeit this would normally be as earnings rather Part 7A) so there is no “clever” scheme here. There are plenty of dodgy schemes out there that take a different view: Current list of named tax avoidance schemes, promoters, enablers and suppliers - GOV.UK