HMRC have issued Brief 49/2009 setting out their view of the inheritance tax implications of contributions to employee benefit trusts (EBTs) by a close company. Section 13 IHTA 1984 generally exempts any contributions from a charge to IHT if the participators in the company are excluded from any benefit from the EBT. However, HMRC now consider that where all the beneficiaries are employees of the company and participators are excluded from benefit but nevertheless obtain a loan from the EBT, this represents a benefit to the participators so that the exemption of Section 13 does not apply. It sounds a bit extreme to suggest that a loan on arm’s length terms is a benefit – and even worse where the loan is made some years after the contribution was made. Do they then retrospectively decide that the exemption in Section 13 did not apply after all and that the contribution should be a chargeable transfer? I guess so – although I wonder what happens if they are out of time. There would seem to be no grounds for discovery because there was nothing wrong with the exemption claimed at the time.
They go on to say that a contribution to the employee benefit trust is a chargeable transfer which can be attributed to participators under Section 94 IHTA 1984 assuming that participators are not excluded from benefit. If participators are excluded from benefit, Section 13 will apply and the new interpretation (sorry – the current view) would not arise.
Section 12 also provides protection from a charge to inheritance tax if the contribution to the EBT is allowable in computing the profits of the company for the purposes of corporation tax. The basic rule for EBTs is that contributions are deductible by the company only when they are paid out to employees and chargeable to tax and NIC on them.
There is no particular time specified in Section 12. All it says is that the contribution is not a transfer of value “if it is allowable in computing [the company’s] profits or gains for the purposes of corporation tax”. The effect of the deferral rules is that relief is given in the subsequent year rather than the current year. That does not mean the contribution is not allowable – quite the contrary, it provides that it is allowable in a later year. (I suppose you could say that the contribution is allowable only after something else has happened – and therefore it is not allowable until that time.) HMRC take the view that Section 12 applies only to the extent that a deduction is allowable to the company for the tax year in which the contribution is made. On this basis, the transfer of value must be apportioned between the individual participators according to their shareholdings and charged to inheritance tax accordingly. HMRC say that this is their current view and pending a resolution of any legal challenge existing cases will be pursued by them on this basis.
When the contribution is subsequently allowed, I wonder if they will revise the treatment of the earlier chargeable transfer. Dream on.
HMRC are also a bit sniffy about the Section 10 exemption (transfers not intended to confer a gratuitous benefit). They say that by its very nature an EBT is a discretionary trust and contributions will often confer a gratuitous benefit on the participations. Well yes. And if it does, then obviously Section 10 cannot be satisfied so this does not take the argument anywhere. The whole idea of an EBT is to provide benefits to employees which is a bona fide commercial purpose – not an intention to confer gratuitous benefits.
I hope that this issue is going to be seriously reconsidered without having to wait for litigation.