Font Size

HM Revenue and Customs Brief 49/09


HM Revenue and Customs -Tax Authorities

Tax Articles
Submit Articles   Back to Articles

Issued 11 August 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.

IHT 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.


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.

About the Author

© Crown Copyright 2009.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.

Follow us @Scopulus_News

Article Published/Sorted/Amended on Scopulus 2009-08-26 15:56:50 in Tax Articles

All Articles

Copyright © 2004-2021 Scopulus Limited. All rights reserved.