The scenario is a contractor loan arrangement between a UK individual and a Jersey based s86 EBT. Under HMRC's settlement guidance on IHT it suggests that, in addition to considering those loans to be income (which they are), they are also subject to IHT. Contractor is understandably unhappy about being tax twice.
I am confused about how IHTA 1984 appears to protect the tax payer from double taxation under s65(5)(b) but does not appear to extend this protection to payments made from s86 trusts which are taxed under s72. Is this what Parliament intended, or am I interpreting the legislation incorrectly? If it is what Parliament intended, does anyone know the rationale?
On a related point, how is "disposition" defined in the context of s72(2)(c). Does it require there to have been an action made by the trustee or would disposition also include something the trustee did NOT do? I am thinking along the lines of whether a dispostion would include a failure to take any action that would lead to the loans being irrecoverable under, say, time limits imposed by limitation law.
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The protection from s.72 charges is in s.70(3)(b) and applies in much the same circumstances as the s.65(5)(b) protection (see s.72(5) importing ss.70(3)-(10)).
I have always read 'disposition' in the context of s.72 as an anti-value shifting provision (i.e. the trustees will be caught by this if they do anything to reduce the value of the settled property, without appointing it out to someone) but if there has been no such value shift, I don't think they are caught by inaction - but would be happy to be corrected...
I should add that 'disposition' normally has a very wide meaning and can include failure to take actions (e.g. failing to take pensions, etc) - it is just in the context of the s.72 charge that I think something more is potentially required.
I agree - "unless it is shown that the omission was not deliberate". In the case of this particular contractor loan scheme there was never any intention of the loans being recalled so one could perhaps consider the inaction of the trustees to be deliberate in this instance.
I have just read the guidance at IHTM42988:
"It is important to note the tenses used in both these sections - Inheritance Tax will not be due only where a payment ‘is or will be’ income. Where an amount exiting a trust is at that time subject to Income Tax (or would be if that person was resident) this relief may apply. But where an amount is subject to an earlier Income Tax charge that is only being paid now, the relief will not be available."
HMRC are giving weight to "is or will be" to support their view that both IHT and income tax are due on the same "payment". Where a loan was made it was subject to income tax at that time. However, when the loan is subsequently written off, s70(3) relief is not available because the income tax liability existed prior to the "payment" from the trust. I would like to have a tribunal consider this interpretation.
That is the case where there was an earlier DR charge i.e. on earmarking, etc) but if the loans were pre-DR, then the charge to income tax arises on write off. Unfortunately, I think HMRC is correct where the income tax charge arose at an earlier time to the IHT charge (t.b.h. I have always taken the view that the charges had to arise on the same event for the relieving provisions to work, but maybe that 'will be' loosens that just slightly).
HMRC's taxpayer unfriendly (and probably wrong) reading of s72 IHTA 1984 was mentioned in Taxation Magazine recently. See: https://www.taxation.co.uk/Articles/2017/06/20/336567/feedback
I agree with your comment that the IHT exit charges must be challenged and there are a number of avenues to explore. It is my view that the "payment" for the purposes of 72(2)(c) occurred at the time the loans were granted, because the trustees made that disposition at that time in full knowledge that those loans would never be repaid. This was the whole premise of the structure, and to argue otherwise is absurd.