Readers’ forum: On the way out

Writing for Tax Journal, BKL tax adviser Terry Jordan offers advice on the potential Inheritance Tax liability on a trust arrangement.


I am in negotiations with HMRC to arrive at a settlement figure to close enquiries into a tax avoidance scheme. It involves a trust arrangement that paid loans to employees, but I am led to believe it does not fall within the definition of an employee benefit trust (EBT).

The inspector has provided calculations that include inheritance tax based on ‘exit charges’ for the value of the loans to the employees. Although I understand that there is a trust involved in the arrangements, it is offshore and held in cash only. It is not, therefore, clear to me on what basis HMRC can charge inheritance tax.

If there is a valid charge to inheritance tax, who would be the settlor in this instance? The money was paid by the company but, if the employee is being taxed on the money that went in, surely it is no longer a company contribution.

Query 18,972– Adviser.

Reply by Terry ‘Lacuna’ Jordan, BKL

Adviser is concerned with HMRC’s enquiries into a non-UK trust that has made loans to employees and we are told that the inspector has included ‘exit charges’ (less colloquially, ‘proportionate charges’) in the calculation of the settlement figure. Had the trust satisfied the provisions of IHTA 1984, s 86 the value would not be ‘relevant property’ and exit charges under s 72 would apply only to payments to a limited class of persons.

Being offshore does not of itself remove the trust from the inheritance tax net. For the fund to constitute ‘excluded property’ the settlor would need to have been non-UK domiciled when the trust was created; the residence of the trustees has no bearing on the trust’s inheritance tax status.

Dymond’s Capital Taxes states at 21.415: ‘In any event, to combat the widespread use of such arrangements, the coalition government introduced the “disguised remuneration” legislation in FA 2011 with effect from December 9, 2010 while HMRC have signalled their intention to scrutinise existing arrangements:

“Those intent on avoiding income tax and NICs by using trust arrangements should also be aware that there could be adverse inheritance tax and trust tax consequences regardless of whether they themselves set up the trust. These include IHT charges when contributions are made to the trust, when funds are transferred from a trust to a sub-trust or removed from the sub-trust when uncommercial loans are made by the trustees and at the ten-year anniversary of the trust.” [Spotlight 12 (August 23, 2011)].’

Adviser has provided only limited information but, on the premise that the charges have not arisen under s 72, apparently they have arisen under IHTA 1984, s 65. Section 65(5)(b) prevents an inheritance tax charge to the extent that the payment will be subject to income tax in the hands of the recipient or would be were he UK resident.

The rate will be determined by s 68 if the trust has not had a ten-year anniversary and under s 69 if it has. It will be necessary to determine who the settlor(s) was and how many settlements there are for calculation purposes.



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