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IHT and EBTs
It has been our long-held view that IHT may be the Achilles heel of planning using Employee Benefit Trusts. This is because the law provides that where a close company makes a contribution to an EBT the participators in the company are treated as making an immediately chargeable transfer for IHT purposes unless;
(a) the EBT excludes participators and persons connected with them from benefit or
(b) the contributions are deductible for CT purposes or
(c) there is no “gratuitous intent” on making the contributions.
It has not always been easy to see how these conditions are fulfilled in relation to particular EBTs. Sometimes it has been argued that (a) is satisfied by excluding participators (etc) from benefitting from the capital of the trust, but that it is not a problem for the trust to lend money to them at commercial rates of interest. Sometimes the view has been expressed as regards (b) that where Sch 24 applies to a contribution (so that it might or might not be deductible in some future period depending on how the trustees use the money) a similar "wait and see" approach must be taken to any possible IHT charge. And sometimes it has been argued that a company makes a payment to an EBT for the wholly commercial purpose of remunerating employees and that there is no thought of gratuitous intent, thus satisfying (c).
HMRC have now published Inheritance Tax Brief 61/09 and clients who have undertaken or are considering undertaking planning involving EBTs will need to be aware of it. This brief sets out HMRC's views of the IHT consequences of contributions to EBTs: and they are not welcome ones! Essentially, HMRC purport to disagree with all three arguments above: where an EBT lends money to a participator (even, apparently, at interest?) this is an "application of funds for the benefit of a participator": if a contribution is not deductible in the year in which it is made it doesn’t count as deductible in assessing any IHT charge: and the wide class of beneficiaries of an EBT makes it "difficult to show" that there is no possibility of any gratuitous intent as regards any beneficiary.
It must be said at once that the correctness of the views expressed by HMRC is by no means accepted by all experts in the field; but pending a determination by the courts in some future case of who is right and who is wrong, it would be unwise to ignore HMRC's expressed intention to apply their stated view in pursuing existing cases. Proceed with even more caution than before. And for advice on these and other tax planning strategies, call us.
