Finance Act 1989

Section 74.

SCHEDULE 5U.K. Employee Share Ownership Trusts

Qualifying trustsU.K.

1U.K.A trust is a qualifying employee share ownership trust at the time it isestablished if the conditions set out in paragraphs 2 to 11 below aresatisfied in relation to the trust at that time.

GeneralU.K.

2(1)The trust must be established under a deed (the trust deed).U.K.

(2)The trust must be established by a company (the founding company) which,at the time the trust is established, is resident in the United Kingdom andnot controlled by another company.

TrusteesU.K.

3(1)The trust deed must provide for the establishment of a body of trustees.

(2)The trust deed must—

(a)appoint the initial trustees;

(b)contain rules for the retirement and removal of trustees;

(c)contain rules for the appointment of replacement and additional trustees.

(3)The trust deed must provide that at any time while the trust subsists (therelevant time)—

(a)the number of trustees must not be less than three;

(b)all the trustees must be resident in the United Kingdom;

(c)the trustees must include one person who is a trust corporation, asolicitor, or a member of such other professional body as the Board may fromtime to time allow for the purposes of this paragraph;

(d)most of the trustees must be persons who are not and have never beendirectors of any company which falls within the founding company’s group atthe relevant time;

(e)most of the trustees must be persons who are employees of companies whichfall within the founding company’s group at the relevant time, and who do nothave and have never had a material interest in any such company;

(f)the trustees falling within paragraph (e) above must, before beingappointed as trustees, have been selected by a majority of the employees ofthe companies falling within the founding company’s group at the time of theselection or by persons elected to represent those employees.

(4)For the purposes of sub-paragraph (3) above a company falls within thefounding company’s group at a particular time if—

(a)it is the founding company, or

(b)it is at that time resident in the United Kingdom and controlled by thefounding company.

BeneficiariesU.K.

4(1)The trust deed must contain provision as to the beneficiaries under thetrust, in accordance with the following rules.

(2)The trust deed must provide that a person is a beneficiary at a particulartime (the relevant time) if—

(a)he is at the relevant time an employee or director of a company which atthat time falls within the founding company’s group,

(b)at each given time in a qualifying period he was an employee or directorof a company falling within the founding company’s group at that given time,and

(c)at that given time he worked as an employee or director of the companyconcerned at the rate of at least 20 hours a week (ignoring such matters asholidays and sickness).

(3)The trust deed may provide that a person is a beneficiary at a particulartime (the relevant time) if—

(a)he has at each given time in a qualifying period been an employee ordirector of a company falling within the founding company’s group at thatgiven time,

(b)he has ceased to be an employee or director of the company or the companyhas ceased to fall within that group, and

(c)at the relevant time a period of not more than eighteen months has elapsedsince he so ceased or the company so ceased (as the case may be).

(4)The trust deed may provide for a person to be a beneficiary if the personis a charity and the circumstances are such that—

(a)there is no person who is a beneficiary within any rule which is includedin the deed and conforms with sub-paragraph (2) or (3) above, and

(b)the trust is in consequence being wound up.

(5)For the purposes of sub-paragraph (2) above a qualifying period is aperiod—

(a)whose length is not less than one year and not more than five years,

(b)whose length is specified in the trust deed, and

(c)which ends with the relevant time (within the meaning of thatsub-paragraph).

(6)For the purposes of sub-paragraph (3) above a qualifying period is aperiod—

(a)whose length is equal to that of the period specified in the trust deedfor the purposes of a rule which conforms with sub-paragraph (2) above, and

(b)which ends when the person or company (as the case may be) ceased asmentioned in sub-paragraph (3)(b) above.

(7)The trust deed must not provide for a person to be a beneficiary unlesshe falls within any rule which is included in the deed and conforms withsub-paragraph (2), (3) or (4) above.

(8)The trust deed must provide that, notwithstanding any other rule which isincluded in it, a person cannot be a beneficiary at a particular time (therelevant time) if—

(a)at that time he has a material interest in the founding company, or

(b)at any time in the period of one year preceding the relevant time he hashad a material interest in that company.

(9)For the purposes of this paragraph a company falls within the foundingcompany’s group at a particular time if—

(a)it is at that time resident in the United Kingdom, and

(b)it is the founding company or it is at that time controlled by thefounding company.

(10)For the purposes of this paragraph a charity is a body of personsestablished for charitable purposes only.

Trustees’ functionsU.K.

5(1)The trust deed must contain provision as to the functions of the trustees.

(2)The functions of the trustees must be so expressed that it is apparentthat their general functions are—

(a)to receive sums from the founding company and other sums (by way of loanor otherwise);

(b)to acquire securities;

(c)to transfer securities or sums (or both) to persons who are beneficiariesunder the terms of the trust deed;

(d)to transfer securities to the trustees of profit sharing schemes approvedunder Schedule 9 to the Taxes Act 1988, for a price not less than the pricethe securities might reasonably be expected to fetch on a sale in the openmarket;

(e)pending transfer, to retain the securities and to manage them (whether byexercising voting rights or otherwise).

SumsU.K.

6(1)The trust deed must require that any sum received by the trustees—U.K.

(a)must be expended within the relevant period,

(b)may be expended only for one or more of the qualifying purposes, and

(c)must, while it is retained by them, be kept as cash or be kept in anaccount with a bank or building society.

(2)For the purposes of sub-paragraph (1) above the relevant period is theperiod of nine months beginning with the day found as follows—

(a)in a case where the sum is received from the founding company, or acompany which is controlled by that company at the time the sum is received,the day following the end of the period of account in which the sum is chargedas an expense of the company from which it is received;

(b)in any other case, the day the sum is received.

(3)For the purposes of sub-paragraph (1) above each of the following is aqualifying purpose—

(a)the acquisition of shares in the founding company;

(b)the repayment of sums borrowed;

(c)the payment of interest on sums borrowed;

(d)the payment of any sum to a person who is a beneficiary under the termsof the trust deed;

(e)the meeting of expenses.

(4)The trust deed must provide that, in ascertaining for the purposes of arelevant rule whether a particular sum has been expended, sums receivedearlier by the trustees shall be treated as expended before sums received bythem later; and a relevant rule is one which is included in the trust deed andconforms with sub-paragraph (1) above.

(5)The trust deed must provide that, where the trustees pay sums to differentbeneficiaries at the same time, all the sums must be paid on similar terms.

(6)For the purposes of sub-paragraph (5) above, the fact that terms varyaccording to the levels of remuneration of beneficiaries, the length of theirservice, or similar factors, shall not be regarded as meaning that the termsare not similar.

SecuritiesU.K.

7(1)Subject to paragraph 8 below, the trust deed must provide that securitiesacquired by the trustees must be shares in the founding company which—U.K.

(a)form part of the ordinary share capital of the company,

(b)are fully paid up,

(c)are not redeemable, and

(d)are not subject to any restrictions other than restrictions which attachto all shares of the same class or a restriction authorised by sub-paragraph(2) below.

(2)Subject to sub-paragraph (3) below, a restriction is authorised by thissub-paragraph if—

(a)it is imposed by the founding company’s articles of association,

(b)it requires all shares held by directors or employees of the foundingcompany, or of any other company which it controls for the time being, to bedisposed of on ceasing to be so held, and

(c)it requires all shares acquired, in pursuance of rights or interestsobtained by such directors or employees, by persons who are not (or haveceased to be) such directors or employees to be disposed of when they areacquired.

(3)A restriction is not authorised by sub-paragraph (2) above unless—

(a)any disposal required by the restriction will be by way of sale for aconsideration in money on terms specified in the articles of association, and

(b)the articles also contain general provisions by virtue of which any persondisposing of shares of the same class (whether or not held or acquired asmentioned in sub-paragraph (2) above) may be required to sell them on termswhich are the same as those mentioned in paragraph (a) above.

(4)The trust deed must provide that shares in the founding company may notbe acquired by the trustees at a price exceeding the price they mightreasonably be expected to fetch on a sale in the open market.

(5)The trust deed must provide that shares in the founding company may notbe acquired by the trustees at a time when that company is controlled byanother company.

8The trust deed may provide that the trustees may acquire securities otherthan shares in the founding company—

(a)if they are securities issued to the trustees in exchange in circumstancesmentioned in section 85(1) of the M1Capital Gains Tax Act1979, or

(b)if they are securities acquired by the trustees as a result of areorganisation, and the original shares the securities represent are sharesin the founding company (construing “reorganisation” and “originalshares” in accordance with section 77 of that Act).

9(1)The trust deed must provide that—

(a)where the trustees transfer securities to a beneficiary, they must do soon qualifying terms;

(b)the trustees must transfer securities before the expiry of the period ofseven years beginning with the date on which they acquired them.

(2)For the purposes of sub-paragraph (1) above a transfer of securities ismade on qualifying terms if—

(a)all the securities transferred at the same time are transferred on similarterms,

(b)securities have been offered to all the persons who are beneficiariesunder the terms of the trust deed when the transfer is made, and

(c)securities are transferred to all such beneficiaries who have accepted.

(3)For the purposes of sub-paragraph (2) above, the fact that terms varyaccording to the levels of remuneration of beneficiaries, the length of theirservice, or similar factors, shall not be regarded as meaning that the termsare not similar.

(4)The trust deed must provide that, in ascertaining for the purposes of arelevant rule whether particular securities are transferred, securitiesacquired earlier by the trustees shall be treated as transferred by thembefore securities acquired by them later; and a relevant rule is one which isincluded in the trust deed and conforms with sub-paragraph (1) above.

Other featuresU.K.

10The trust deed must not contain features which are not essential orreasonably incidental to the purpose of acquiring sums and securities,transferring sums and securities to employees and directors, and transferringsecurities to the trustees of profit sharing schemes approved under Schedule9 to the Taxes Act 1988.

Rules about acquisition etc.U.K.

11(1)The trust deed must provide that, for the purposes of the deed, thetrustees—

(a)acquire securities when they become entitled to them;

(b)transfer securities to another person when that other becomes entitled tothem;

(c)retain securities if they remain entitled to them.

(2)But if the deed provides as mentioned in paragraph 8 above, it mustprovide for the following exceptions to any rule which is included in it andconforms with sub-paragraph (1)(a) above, namely, that—

(a)if securities are issued to the trustees in exchange in circumstancesmentioned in section 85(1) of the M2Capital Gains Tax Act1979, they shall be treated as having acquired them when they became entitledto the securities for which they are exchanged;

(b)if the trustees become entitled to securities as a result of areorganisation, they shall be treated as having acquired them when they becameentitled to the original shares which those securities represent (construing “reorganisation” and “original shares” in accordance with section77 of that Act).

(3)The trust deed must provide that—

(a)if the trustees agree to take a transfer of securities, for the purposesof the deed they become entitled to them when the agreement is made and noton a later transfer made pursuant to the agreement;

(b)if the trustees agree to transfer securities to another person, for thepurposes of the deed the other person becomes entitled to them when theagreement is made and not on a later transfer made pursuant to the agreement.

Position after trust’s establishmentU.K.

12A trust which was at the time it was established a qualifying employeeshare ownership trust shall continue to be one, except that it shall not besuch a trust at any time when the requirements mentioned in paragraph 3(3)(a)to (f) above are not satisfied.

13U.K.A trust is an employee share ownership trust at a particular time (therelevant time) if it was a qualifying employee share ownership trust at thetime it was established; and it is immaterial whether or not it is aqualifying employee share ownership trust at the relevant time.

InterpretationU.K.

14U.K.For the purposes of this Schedule the following are securities—

(a)shares;

(b)debentures.

15U.K.For the purposes of this Schedule, the question whether one company iscontrolled by another shall be construed in accordance with section 840 of theTaxes Act 1988.

16(1)For the purposes of this Schedule a person shall be treated as having amaterial interest in a company if he, either on his own or with one or moreof his associates, or if any associate of his with or without other suchassociates,—U.K.

(a)is the beneficial owner of, or able (directly or through the medium ofother companies or by any other indirect means) to control, more than 5 percent. of the ordinary share capital of the company, or

(b)possesses, or is entitled to acquire, such rights as would, in the eventof the winding-up of the company or in any other circumstances, give anentitlement to receive more than 5 per cent. of the assets which would thenbe available for distribution among the participators.

(2)In this paragraph—

(a)“associate” has the same meaning as in section 417(3) and (4)of the Taxes Act 1988, but subject to sub-paragraph (3) below,

(b)“control” has the meaning given by section 840 of that Act,and

(c)“participator” has the same meaning as in Part XI of thatAct.

(3)Where a person has an interest in shares or obligations of the company asa beneficiary of an employee benefit trust, the trustees shall not be regardedas associates of his by reason only of that interest unless sub-paragraph (5)below applies in relation to him.

(4)In sub-paragraph (3) above “employee benefit trust” hasthe same meaning as in paragraph 7 of Schedule 8 to the Taxes Act 1988, exceptthat in its application for this purpose paragraph 7(5)(b) of that Scheduleshall have effect as if it referred to the day on which this Act was passedinstead of to 14th March 1989.

(5)This sub-paragraph applies in relation to a person if at any time on orafter the day on which this Act was passed—

(a)he, either on his own or with any one or more of his associates, or

(b)any associate of his, with or without other such associates,

has been the beneficial owner of, or able (directly or through the mediumof other companies or by any other indirect means) to control, more than 5 percent. of the ordinary share capital of the company.

(6)Sub-paragraphs (9) to (12) of paragraph 7 of Schedule 8 to the Taxes Act1988 shall apply for the purposes of sub-paragraph (5) above as they apply forthe purposes of that paragraph.