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EBT/Contractor Loan Settlement – IHT Aspect

Will there actually be an exit charge when the trust is wound up?

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We have a client who is just about agreeing a settlement with HMRC before the April 2019 loan charge kicks in. The calculations have been sent to us with a note that the IHT element hasn’t been calculated as yet pending more information being provided.

A possible argument against such a charge has come to my mind so I wanted to see what AWeb users thought.

The structure is pretty typical, money has been provided to a sub-trust for the benefit of the employee. The money was loaned to said employee, the beneficiary. The trustees have to act in the best interests of the beneficiary, and so will never request the loan be repaid, as that wouldn’t be in the beneficiaries interest.

At the point where we are settling, and likely going to have the loan written off to tidy things up, does the trust actually have any value with which an IHT exit charge can be calculated?

I presume the route HMRC will argue is that if a £500k loan is written off, then an exit charge based on that £500k is due.

My argument would be that as the loan has been provided with no realistic prospect of being repaid, then there is no value in the trust at the point it is written off. The trustees can’t request the loan be repaid, or initiate legal proceedings to see the loan repaid, as it wouldn’t be in the beneficiaries interests, and so there is no way to collect it other than the beneficiary deciding to repay the amount (which can’t happen).

I would argue that the loss of value in the trust occurred at the point the money was loaned to the beneficiary (i.e. at the time the trust was created). It was the action of loaning the money, with no repayment terms and no realistic prospect of recovering the loan in future, that saw the value of the trust’s assets fall.

Therefore, any exit charge should have been calculated at that time, and as it happened within the first quarter of the trusts existence, the actual rate of tax is 0%, so no tax due.


I think there is a decent argument here but feel free to pick holes in it.



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18th Feb 2019 17:25

Yes; there are multiple arguments like that* and you may have to test them in the FTT (although there is bound to be a test case in due course as there are 1000s of EBT settlement cases with s65 or s72 IHTA 1984 IHT charge in dispute).

*It is probably easier to argue Rangers does not apply to the contribution - which may be easier than a lot of people think, as Rangers had quite extreme facts and was not an EFRBS, which are arguably treated differently.

If the payment was a true bonus then arguably it's a perk and within the Lord Hodge exclusions (that perk point was not argued by the taxpayer in Rangers).

Obviously you should settle without prejudice to such arguments.

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18th Feb 2019 18:00

If you are conceding that the loan was really a payment, then your argument makes some sense.

I'm not sure you are right about it having been in the first quarter, though, as you'd time it from the creation of the head trust.

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