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.
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)).
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:
Where the trust deed specifically purports to exclude the participators from benefit but nevertheless the participators do benefit in fact for example:
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.
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.
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.
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:
Also the timing of a deduction can be deferred to a later period by the following:
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.
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.
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:
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.
For accounting periods ending on or after 1 April 2009:
For tax years 2005-06 onwards:
Issued 12 October 2009
