Tax & Accounting News

Employee Benefit Trusts Under Attack

29/10/2009

HM Revenue and Customs (HMRC) has been continuing its crackdown on Employee Benefit Trusts (EBTs) over recent months. HMRC is saying that Inheritance Tax (IHT) is due on contributions to EBTs by ‘close companies’ – companies that are controlled either by the directors or by five or fewer participants.

While certain transfers of value by closed companies could result in an IHT liability, exceptions apply in the case of transfers that are deductible for Corporation Tax purposes, transfers which are solely for the benefit of employees (as opposed to directors or major shareholders) and transfers not intended to confer any ‘gratuitous benefit’.

It is likely that HMRC’s position will face a tribunal challenge at some point, although it will be some time until the situation is clarified by a legal ruling. In the meantime, companies may wish to refine their arrangements in an effort to avoid a penalty if none of the above exemptions apply.

Closed companies can still implement EBTs with no exposure to IHT if those who have, or have had in the last ten years, an interest of five per cent or more in the company are excluded. Alternatively, those with such holdings may have a limitation of benefits on which income tax would be due, or have their benefits limited to the IHT nil-rate band.

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