HM Revenue and Customs Brief 61/09
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Issued 12 October 2009
Inheritance Tax on contributions to Employee Benefit Trusts
The purpose of this note is to set out HM Revenue & Customs (HMRC) current
view on the Inheritance Tax position in relation to contributions to an Employee
Benefit Trust. Although the same principles apply where an individual makes a
contribution to an Employee Benefit Trust the main thrust of this note is aimed
at the more common scenario where the contribution is made by a close company as
defined in s102(1). All statutory references are to IHTA 1984 unless otherwise
stated.
Employee Benefit Trust within S86
For the purposes of this note it is assumed that the Employee Benefit Trust
satisfies the provisions of s86 that is, essentially the trust is one where the
funds are held at the trustees’ discretion to be applied for the benefit of 'all
or most of the persons employed by or holding office with the body concerned'
(s86(3)(a)).
Impact of S13 on whether the contribution is a transfer of value
The effect of s13 is that an Inheritance Tax charge arises under s94 on
contributions to an Employee Benefit Trust made by a close company where:
- the contribution is to an Employee Benefit Trust which satisfies s86
- the participators (as defined in s102(1)) in that company and any person
connected with them are not excluded from benefit under the terms of the
Employee Benefit Trust (so that s13(2) disapplies s13(1)) and
- the contributions are not allowable in computing the company’s profits for
Corporation Tax purposes (s12) and/or it is not shown for the purposes of s10
that the contributions are made in arms-length transactions not intended to
confer a gratuitous benefit
Participators excluded from benefit
Where the trust deed specifically purports to exclude the participators from
benefit but nevertheless the participators do benefit in fact for example:
- by payment to them of loans or
- by assigning funds from the Employee Benefit Trust on sub-trusts for their
benefit and that of their family
Then HMRC take the view that s13(2) disapplies s13(1) and the Inheritance Tax
charge under s94 arises because the funds have been applied for the benefit of
the participators.
Impact of MacDonald (HMIT) v Dextra ('Dextra')
This decision applies to contributions made before 27 November 2002.
In that case, the trust deed gave the trustee wide discretion to pay money
and other benefits to beneficiaries and power to lend them money. The potential
beneficiaries of the trust included past present and future employees and
officers of the participating companies in the Dextra group and their close
relatives and dependants. The trustee did not make payments of emoluments out of
the funds in the Employee Benefit Trust during the periods concerned, instead
the trustee made loans to various individuals who were beneficiaries under the
terms of the Employee Benefit Trust.
The point at issue was whether the company's contributions to the Employee
Benefit Trust were 'potential emoluments' within the meaning of s43(11)(a)
FA1989 being amounts 'held by an intermediary with a view to their becoming
relevant emoluments'.
The House of Lords held that the contributions by the company to the Employee
Benefit Trust were potential emoluments as there was a 'realistic possibility'
that the trustee would use the trust funds to pay emoluments. This meant that
the company's deductions were restricted. The company could only have a
deduction for the amount of emoluments paid by the trustee within nine months of
the end of the period of account for which the deduction would otherwise be due.
Instead relief for the amount disallowed would be given in the period of
accounting in which emoluments were paid.
Sch 24 FA 2003
This statute applies to contributions made after 27 November 2002.
S143 and Schedule 24 Finance Act 2003 prevents a deduction for Corporation
Tax purposes until the contribution made for employee benefits is spent by a
payment that has been subjected to both PAYE and National Insurance
contributions. Thus the position already established in Dextra is therefore
effectively formalised by legislation for events on or after 27 November 2002.
Dispositions allowable in computing profits for Corporation Tax purposes -
S12
HMRC take the view that there is nothing in s12 that enables its relieving
effect to be given provisionally while waiting to see whether the contribution
will become allowable for Corporation Tax purposes.
A deduction in the Corporation Tax accounts can be permanently disallowed by
the following:
- capital expenditure disallowed by s74(1)(f)ICTA1988.
- expenditure not wholly and exclusively incurred by s74(1)(a)ICTA
Also the timing of a deduction can be deferred to a later
period by the following:
- generally accepted accounting practice (UITF13 and UITF32) which
capitalises Employee Benefit Trust contributions by showing them as an asset
on the company's balance sheet until and to the extent that the assets
transferred to the intermediary vest unconditionally in identified
beneficiaries
- expenditure subject to s43 FA89 that is, the Dextra decision - see above
- and post 27 November 2002 expenditure subject to Sch 24 FA 2003 - see
above
It is HMRC’s view that if expenditure is not allowable for any of
these reasons then relief under s12 is not available. The effect of this for
Inheritance Tax purposes is that the contribution to the Employee Benefit Trust
is a chargeable transfer under s94, assuming that participators are not excluded
from benefit (s.13(2))
Relief from the Inheritance Tax charge is only available under
s12(1)IHTA to the extent that a deduction is allowable to the company for the
tax year in which the contribution is made.
Inheritance Tax provisions on due date for tax and interest
Where, on HMRC’s view of the matter, a charge to Inheritance Tax arises under
s.94, any tax payable is due six months after the end of the month in which the
contribution is made or at the end of April in the year following a contribution
made between 6 April and 30 September inclusive. Interest is charged on any
unpaid tax from the due date.
Does s10 IHTA provide protection from the Inheritance Tax charge?
The s10 test is a stringent one and in the view of HMRC it must be shown
inter alia that there was no intent to confer any gratuitous benefit on any
person. The possibility of the slightest benefit suffices to infringe the
requirement.
HMRC note that:
- by its very nature an Employee Benefit Trust is a discretionary trust
- to satisfy the conditions of s86 the trustees' absolute discretion must
remain unfettered
- the potential 'beneficiaries' normally include the participators
themselves, former employees and the wives husbands widows widowers and
children and step children under the age of 18 of such employees and former
employees
- contributions to an Employee Benefit Trust will often confer a gratuitous
benefit on the participators
In these circumstances, HMRC think it will normally be difficult to show that
s10 is satisfied at the date the contributions were made to the trust. HMRC
take the view that it is the possibility of gratuitous intent at the date the
contribution is made that we have to consider.
Charge on participators under S94
Where a disposition is not prevented by s13 from being a transfer of value, a
charge arises under s94 and the transfer of value is apportioned between the
individual participators according to their respective rights and interest in
the company immediately before the contribution to the Employee Benefit Trust
giving rise to the transfer of value.
Summary
This sets out HMRC’s current view. Pending the resolution of any legal
challenge to this view, existing cases will be pursued by HMRC on this basis.
Footnote
Corporation Tax
For accounting periods ending on or after 1 April 2009:
- references to Schedule 24 Finance Act 2003 should be taken to be
references to Sections 1290 to 1297 Corporation Tax Act 2009
- references to s74(1)(a) ICTA 1988 should be taken to be references to s54
Corporation Tax Act 2009
- references to s74(1)(f) ICTA 1988 should be taken to be references to s53
Corporation Tax Act 2009
Income Tax
For tax years 2005-06 onwards:
- references to Schedule 24 Finance Act 2003 should be taken to be
references to Section 38 to 44 Income Tax (Trading and Other Income) Act 2005
- references to s74(1)(a) ICTA 1988 should be taken to be references to s34
Income Tax (Trading and Other Income) Act 2005
- references to s74(1)(f) ICTA 1988 should be taken to be references to s33
Income Tax (Trading and Other Income) Act 2005
© Crown Copyright 2009.
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