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HMRC have set out their current view on the inheritance tax position in relation to contributions to an employee benefit trust.
Revenue & Customs Brief 49/09 explains that although the same principles apply where an individual makes a contribution to an employee benefit trust, this is mainly aimed at contributions made by a close company as defined in IHTA 1984, s 102(1).
Where the trust deed specifically purports to exclude the participators from benefit but in fact the participators do benefit, the taxman takes the view that s 13(2) disapplies s 13(1) and the IHT charge arises because the funds have been applied for the benefit of the participators.
The decision in Dextra Accessories Ltd v MacDonald [2005] STC 1111 applies to contributions made before 27 November 2002.
In that case, the House of Lords held that the company’s contributions were potential emoluments within the meaning of FA 1989, s 43(11)(a), which 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.
Finance Act 2003, Sch 24 applies to contributions made after 27 November 2002 and prevents a corporation tax deduction until the contribution made for employee benefits is spent by a payment that has been subjected to both PAYE and National Insurance.
HMRC say that nothing in s 12 enables its relieving effect to be given provisionally while waiting to see whether the contribution will become allowable for corporation tax purposes.
It is the Revenue's view that if expenditure is not allowable, then s 12 relief is not available.
The effect of this for inheritance tax purposes is that the contribution to the trust is a chargeable transfer, assuming that participators are not excluded from benefit.
Relief from the inheritance tax charge is only available under IHTA 1984, s 12(1) to the extent that a deduction is allowable to the company for the tax year in which the contribution is made.
Where this charge arises, 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 IHTA 1984, s10 test is a stringent one and in the view of HMRC it must be shown that there was no intent to confer any gratuitous benefit on any person.
The possibility of the slightest benefit suffices to infringe the requirement.
The taxman notes that by its very nature, an employee benefit trust is a discretionary trust, thus to satisfy the conditions of s 86 the trustees' absolute discretion must remain unfettered.
In these circumstances, HMRC think it will normally be difficult to show that s 10 is satisfied at the date the contributions were made to the trust. They say it is the possibility of gratuitous intent at the date the contribution is made that has to be considered.
Where a disposition is not prevented by s 13 from being a transfer of value, a charge arises under s 94 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 trust giving rise to the transfer of value.
Malcolm Gunn of Squire Sanders and Dempsey said, ‘Although IHTA 1984, s 12 is ambiguous, the use of the present tense (“if it is allowable in computing profits”) would seem to favour HMRC's intetrpretation.
'However HMRC's view that the s 10 exemption (transactions at arm's length) cannot apply to a commercial trust such as an EBT is much more controversial. No doubt an appeal case on this will soon surface.'
