Demeter has recently taken up a new employment and is seeking advice on the tax treatment of certain components of his remuneration package, and the relief(s) available to reduce the chargeable gain on the sale of his house.
Demeter:
– Is UK resident and domiciled.
– Commenced employment with Poseidon Ltd on 1 December 2018.
– Will have no source of income, other than from Poseidon Ltd, in all relevant future tax years.
– Will be a higher rate taxpayer in all relevant future tax years.
– Has relocated to London, from Manchester, a city more than 150 miles north of London, to take up this employment.
Remuneration package from Poseidon Ltd:
– Demeter will receive an annual salary of £130,000.
– On 1 December 2018, Poseidon Ltd made a one-off lump sum payment of £20,000 to Demeter as an inducement to take up employment with the company.
– Poseidon Ltd paid Demeter £5,000 towards his costs of relocating to London. The company is also paying him £1,500 each month for four months from 1 December 2018 towards renting accommodation in London until he purchases a new house on 1 April 2019.
– On 1 December 2018, Demeter was granted share options in Poseidon Ltd’s unapproved share option scheme.
– From 6 April 2019, Demeter will participate in Poseidon Ltd’s approved occupational pension scheme.
Relocation to London:
– Demeter incurred costs in relation to his relocation to London of £6,000. This amount includes estate agent fees of £2,800 in connection with the sale of his house in Manchester on 31 October 2018.
– Demeter signed a four-month lease for a flat in London from 1 December 2018 at a monthly rental of £1,700.
House in Manchester:
– Demeter purchased the house on 1 May 2005 and lived in it as his main residence.
– Demeter let the top floor of the house (comprising 30% of the total house) to tenants from 1 May 2007 to 31 October 2018. The tenants did not share Demeter’s living accommodation or take meals with him.
– Demeter continued to occupy the remainder of the house as his main residence until 31 October 2018, when the entire house was sold.
– The sale gave rise to a gain, before any reliefs, of £94,000.
– Demeter did not own any other house throughout the period from 1 May 2005 to 31 October 2018.
Demeter – pension contributions:
– Demeter has made tax-allowable contributions of £40,000 (gross) to a personal pension plan for the last five tax years and will continue to do so in future tax years.
– From the tax year 2019/20, Poseidon Ltd will contribute an amount equal to 10% of Demeter’s annual salary to its approved occupational pension scheme.
– Demeter will make no contributions to Poseidon Ltd’s occupational pension scheme.
Poseidon Ltd’s share option scheme:
– On 1 December 2018, Poseidon Ltd granted Demeter options over 3,000 shares in its unapproved share option scheme at a 5% discount on the market value of the shares on that date.
– The market value of Poseidon Ltd shares on 1 December 2018 was £4·20 per share.
– Demeter will exercise the options on 6 April 2024, and immediately sell the shares.
– Poseidon Ltd believes that the market value of its shares on 6 April 2024 will be £6·00 per share.
Required:
Explain the extent to which the receipt of the £20,000 lump sum inducement payment, and the relocation package in relation to Demeter’s move to London, will give rise to taxable employment income for him.
Demeter
Receipt of the one-off lump sum inducement payment and relocation package
The one-off lump sum inducement payment of £20,000 paid on commencement of Demeter’s employment is fully taxable as it wholly relates to future services to be performed by Demeter.
The total amount received by Demeter in relation to his relocation is £11,000 (£5,000 + (£1,500 x 4)). Demeter did not previously live within a reasonable daily travelling distance of his new employment, so is eligible for a maximum tax allowable amount of £8,000, provided he has spent at least this amount on qualifying expenditure.
Demeter’s qualifying expenditure comprises all the costs relating to his move, including the estate agent fees on the sale of his house of £2,800, and the rent on his accommodation in London of £1,700 per month from 1 December 2018 until he purchases a new house on 1 April 2019. His total qualifying expenditure is therefore £12,800 (£6,000 + (£1,700 x 4)). This clearly exceeds £8,000, so the taxable amount of Demeter’s relocation package is £3,000 (£11,000 – £8,000).
Identify, and calculate, with brief explanations, the relief(s) available to Demeter to reduce the chargeable gain of £94,000 on the sale of his house in Manchester on 31 October 2018.
Reliefs available to Demeter to reduce the chargeable gain on the sale of his house in Manchester
As the house was Demeter’s only residence, principal private residence (PPR) relief will be available to exempt the proportion of the gain which relates to his actual or deemed occupation of the property. The relief is calculated as follows:
Demeter owned the house for 13·5 years (1 May 2005 to 31 October 2018).
Availability of PPR relief
Explain, with supporting calculations, the tax consequences for Demeter of participating in:
(i) Poseidon Ltd’s approved occupational pension scheme in the tax year 2019/20.
(ii) Poseidon Ltd’s unapproved share option scheme, in respect of the grant of the options on 1 December 2018 and the exercise of the options and subsequent sale of the shares on 6 April 2024.
Note: Ignore national insurance contributions (NIC) in parts (i) and (ii).
(i) Tax consequences for Demeter of participating in Poseidon Ltd’s approved occupational pension scheme in 2019/20
Poseidon Ltd’s contribution into its occupational pension scheme on Demeter’s behalf of £13,000 (10% x £130,000) will be an exempt benefit for Demeter, so no tax liability will arise on this.
However, the contributions will count towards Demeter’s annual allowance. This will remain at £40,000 as Demeter’s threshold income of £90,000 (net income (£130,000) less Demeter’s personal pension contributions (£40,000)) does not exceed the £110,000 threshold.
Demeter has no unused annual allowance to bring forward from earlier tax years as he has made contributions up to the maximum amount each year. As the total contributions in 2019/20 of £53,000 (£13,000 + £40,000) will exceed the annual allowance, an annual allowance charge will be payable. Accordingly, as a higher rate taxpayer Demeter will pay an annual allowance charge of £5,200 (40% x £13,000 (£53,000 – £40,000)).
Tutorial note: There is no need to calculate Demeter’s adjusted income as the amount of annual allowance will not be reduced regardless because his threshold income is below £110,000.
(ii) Tax consequences for Demeter of participating in Poseidon Ltd’s unapproved share option scheme
No income tax will be payable by Demeter on the grant of the options on 1 December 2018.
When Demeter exercises the options on 6 April 2024, income tax will be payable on the excess of the market value of the shares at the date of exercise over the price paid by Demeter, i.e. £6,030 ((£6·00 – (£4·20 x 95%) x 3,000). The income tax payable is therefore £2,412 (£6,030 x 40%).
The exercise of the shares has no impact on Demeter’s personal allowance because his adjusted net income is below £100,000. There will also be no impact on Demeter’s annual allowance charge because his threshold income remains below £110,000.
As Demeter will sell the shares immediately following the exercise of the options, the shares will not have increased in value and so no chargeable gain will arise.