EBT IHT liability as sponsoring company dissolved?

An old EBT has an alleged IHT liability because the sponsoring company was dissolved...

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Esteemed tax folk, does anyone have any knowledge or better still experience of EBT's allegedly attracting an inheritance tax liability as a result of the sponsoring company ceasing to exist?

HMRC's view seems to be that s86(3)(a) could not, from the time the company ceased to exist, be satisfied as following the company being struck off it ceased to have any office holders or employees and hence s86(1) cannot be satisfied beyon the company's existence ending.

Any thoughts?

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By Justin Bryant
12th Dec 2023 18:03

That's just typical HMRC EBT b ollocks.
There is nothing in any case law, textbooks nor HMRC’s manual that supports HMRC's view that s86 IHTA 1984 ceases to apply re dormant or insolvent companies. If HMRC's view were correct, then any company that ceases business due to insolvency would be in the same position as a dormant company, yet HMRC consider that EBTs continue notwithstanding a company’s insolvency (unless the EBT terms say otherwise) and that s86 only ceases to apply to such EBTs if its assets are available for the company’s creditors (which is invariably not the case). See: https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm42933 . If HMRC considered that the company’s insolvency by itself (i.e. without more) caused s86 to cease to apply to the EBT regardless, then their IHT manual would have clearly said so. Many EBT settlor companies subsequently become dormant and/or insolvent and if HMRC's view was correct re dormant or insolvent companies then this would undoubtedly be confirmed somewhere authoritative, but HMRC do not cite any authority to support their view. Furthermore, a company can of course cease dormancy and become active again and become dormant again and so on. S86 would be unworkable in such circumstances if your HMRC's were correct (especially since in practice it is usually far from simple to identify the exact date of cessation/(re)commencement of a company’s business). Legislation must not be interpreted to produce unworkable results/outcomes, and it must be interpreted to produce workable results/outcomes. See para 80 here: https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j12683/TC...

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By Justin Bryant
12th Dec 2023 18:07

That's clearly b ollocks as the EBT can apply to former employees.

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By Justin Bryant
12th Dec 2023 18:07

.

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Replying to Justin Bryant:
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By Northern Taxman
13th Dec 2023 09:13

Indeed, of that there's no doubt, and HMRC fully accept and appreciate that, and they also accept that a company can have more former employees than current employees. However, they seem to interpret s86(1) in such a way that, if the company ceases to exist and hence has no employees, the class definitions cannot be met beyond the time the company was dissolved. HMRC is seeking to apply a temporal limitation with the cessation of the company bringing to an end the inheritance tax exemptions otherwise afforded to EBTs. In my view, the class definitions haven't changed; beneficiaries continue to be defined as all current and former employees of LtdCo and the fact that former employees outnumber current employees [zero] would seem irrelevant.

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Replying to Northern Taxman:
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By Justin Bryant
13th Dec 2023 09:20

If HMRC’s view were correct, then any company that ceases business due to insolvency would be in the same position, yet HMRC consider that EBTs continue notwithstanding a company’s insolvency (unless the EBT terms say otherwise) and that s86 only ceases to apply to such EBTs if its assets are available for the company’s creditors - which is invariably not the case. See: https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm42933 . If HMRC considered that the company’s insolvency by itself (i.e. without more) caused s86 to cease to apply to the EBT regardless, then their IHT manual would have clearly said so.

Many EBT settlor companies subsequently become insolvent and if HMRC’s view was correct then this would undoubtedly be confirmed somewhere authoritative (textbooks, case law etc.), but it isn’t.

So it’s still b ollocks.

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Replying to Justin Bryant:
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By Northern Taxman
13th Dec 2023 09:56

I'm not disagreeing on the b ollocks front. I feel HMRC is incorrect. Regarding IHTM42933, I read this as a non-qualifying beneficiary receiving benefit from the EBT causing it to lose IHT exemption and carries on thereafter as a relevant property trust.. i.e. nothing to do with the company liquidation per se, save in this instance it is the company's creditors who are the non-qualifying beneficiary.

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Replying to Northern Taxman:
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By Justin Bryant
13th Dec 2023 10:03

If you're saying IHTM42933 looks correct, I'd agree (which of course justifies my above point).

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By Justin Bryant
12th Dec 2023 18:09

That's clearly wrong as the EBT can apply to former employees.

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By Justin Bryant
13th Dec 2023 15:41

Also, I have never seen a s86 “present tense” argument anywhere.

See para 14 et seq here, where a present/past tense legislation argument failed (the use of the present tense was stylistic and the definition was not temporal re a former company director).

https://www.bailii.org/uk/cases/UKFTT/TC/2022/ukftt_tc_2022_189.html

https://www.rpc.co.uk/perspectives/tax-take/tribunal-upholds-hmrc-notice...

So, the EBT should continue as a s86 trust notwithstanding the settlor company’s eventual winding up, unless the trust deed states otherwise re its termination on the settlor’s winding up per the example below:

https://www.providentfinancial.com/application/files/3416/1445/4276/trus...

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Replying to Justin Bryant:
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By Justin Bryant
13th Dec 2023 16:48
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Replying to Justin Bryant:
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By Justin Bryant
17th Jan 2024 09:49

I note the above case is cited here: https://www.procedure.tax/8-paye

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By Justin Bryant
09th Jan 2024 08:54

One assumes HMRC are trying to make dead company analogies with this: https://www.step.org/step-journal/step-journal-may-2010/when-spouse-not-...

Which is a pretty weak argument to put it mildly.

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