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EBT loans and IHT complications

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Conflicting rules on employee benefit trusts (EBTs) and the deduction of liabilities for IHT from a deceased person’s estate have been resolved under FA 2013, encouraging further usage of HMRC’s EBT settlement opportunity.

Finance Act 2013 introduced new provisions in relation to the deductibility of liabilities from an individual’s estate for inheritance tax purposes on their death. Under IHTA 1984 s 175A, as inserted by FA 2013 Sch 36, a liability may be taken into account when determining the value of a person’s estate immediately before death, if it is discharged on or after death and provided it is not prevented from being taken into account by the Act.

Where a liability is not wholly discharged, it may only be taken into account where there is:

  • a real commercial reason for it not to be discharged; and
  • securing a tax advantage is not the main, or one of the main, purposes of leaving it outstanding.

This has had a surprising knock on effect in relation to EBTs.

Following the introduction of the disguised remuneration rules in 2011, HMRC has vigorously pursued EBTs. In 2011, HMRC launched the EBT settlement opportunity, which offers employers the opportunity to settle such tax liabilities, avoid a potential enquiry and wind up the EBT with distributions to employees, if appropriate.

However in some cases, employees have been reluctant to accept a settlement. Many employees have received loans from EBTs.

A loan written off after death is not subject to income tax and, prior to the changes in FA 2013, provided a deduction from the employee’s estate, thereby sheltering inheritance tax. This has discouraged employees from entering the settlement opportunity.

However, under the new rules, employees will not receive the deduction unless they repay the loans, placing them back within the scope of the disguised remuneration rules and so subject to income tax and NIC upon distribution.

A major incentive for many employees with outstanding loans to reject the settlement opportunity has therefore been removed and appears to have resulted in a renewed enthusiasm for the settlement opportunity.