Employment Benefit Trusts and IHT exposure

In Revenue & Customs Brief 49/09 (published 11 August 2009), HMRC set out their view on the Inheritance Tax (IHT) implications of contributions by close companies to Employment Benefit Trusts (EBTs).

Revenue & Customs Brief 61/09 updates their view.

In essence, it would appear that HMRC are set to challenge the availability of the exemptions from an IHT charge on a transfer to an EBT. If HMRCs view is successful (and one imagines a legal challenge to this view will be forthcoming) then a potential "lifetime" charge to IHT applies.

The main IHT exemptions commonly thought to be available on a transfer to an EBT are firstly, on the basis that the contributions are not intended to confer a gratuitous benefit (in other words, the payments are made at arm's-length for remunerative reasons only) and secondly, that the contribution is a disposition allowable for Corporation Tax purposes.

The R & C briefs confirm HMRC do not necessarily agree either applies and will pursue "existing cases" on the basis of their view.

A successful challenge by HMRC would result in the amount of the contribution being attributed to the shareholders, according to their shareholdings. Such attributions would amount to Chargeable Lifetime Transfers, subject of course to the available IHT threshold arising to that shareholder at the time of the EBT contribution.

As well as any potential IHT liability itself, there are potential penalty/interest implications, under the time limits for reporting IHT events.

Clearly, this challenge will depend on the detail within each EBT, but it will be of concern to users of EBTs as a tax planning device, who have sought to apply remuneration via an EBT on favourable terms.

It is understood that careful drafting of EBT deeds may well avoid this problem going forward, but practitioners whose clients have used EBTs in recent years may want to review individual clients' potential exposure.

As well as being able to provide technical assistance in this area, we would be interested to hear of practitioners experiences of HMRCs approach.