BIM44550 - Specific deductions: Employee benefit trusts: general purpose EBT contributions: introduction

Employers’ contributions to employee benefit trusts are allowable as a deduction (at some time) unless they are:

• capital expenditure, see BIM44560, and / or
• not wholly and exclusively for the purposes of the employer’s trade (ICTA88/S74 (1)(a)), see BIM44565.

Timing of deductions

The timing of when a deduction is given for a contribution to a general purpose EBT, in computing an employer’s profits taxable under Schedule D, depends on:

• when it is deducted in accounts prepared in accordance with generally accepted accounting practice, and
• whether the timing of that deduction is deferred for tax purposes by specific legislation such as FA89/S43 or FA03/SCH24.

For contributions to general purpose EBTs on or after 27 November 2002 FA03/SCH24 broadly aligns the timing and amount of the employer’s deduction with the timing and amount on which the employee is chargeable to income tax and on which NICs liability arises.

Further guidance on the timing of deductions is at BIM44570 onwards.

Disallowing deductions - Inheritance Tax consequences

A report should be made to Capital Taxes (IHT) where an EBT contribution has been disallowed as a deduction (whether the deduction has been deferred to a later period by FA89/S43 or FA03/SCH24 or disallowed altogether) if:

• the company is a close company, and
• any of its shareholders are beneficiaries or potential beneficiaries of the EBT, for example by:

In these cases a report should also be made to CT (IHT) if deductions for such contributions are allowed for a later period under FA03/SCH24/PARA1 (4), see BIM44605.

The background to the need for such reports is that when an individual settles assets in a discretionary trust, a lifetime Inheritance Tax (IHT) charge may arise. Similarly, if a close company settles assets in a discretionary trust from which shareholders in the company may benefit, there may a lifetime IHT charge on the shareholders in proportion to their shareholdings. However, there are no IHT consequences if a close company makes a contribution to an EBT which is allowed as a deduction in computing the company’s taxable profits (IHTA84/S12).

Reports should be made to Capital Taxes (IHT) Technical Group, Meldrum House, 15 Drumsheugh Gardens, Edinburgh or by e-mail to EBT, Meldrum (RP CS Cap Taxes Edinburgh).