Share this content

Interesting GAAR EBT IHT deathbed planning opinion

Didn't find your answer?

https://www.gov.uk/government/publications/gaar-advisory-panel-opinion-o...

https://www.step.org/news/estate-gift-employee-benefit-trust-ruled-be-ag...

The GAAR panel, which of course is a packed jury in HMRC's pocket, do not seem to give any proper justification for their "contrived/abnormal" assertions in paras 11.2 & 11.4, and paras 12.1 & 12.4 are more or less a non-sequiturs re the Hansard extract*. In paras 12.5 & 12.6 they seem to be putting a trading company requirement gloss on s 28; whereas there are absolutely no such restrictions and an investment company should be fine, as that's necessarily a business (and not a hobby etc.). They then seem to row back on that in para 12.10 with some vague minimum condition (not in the Hansard extract nor the legislation) for the business to have "reasonable...activity" requiring employees (at least at the point in time of the gift), whatever that might actually mean in practice (e.g. what about having just one brilliant employee who outsources everything and why should all the employees not be directors and what's wrong with just one director and no other employees as in Postlethwaite's Executors V HMRC [2007] STC (SCD) 83?). In paras 12.7  & 12.9 they suggest that benefitting family member employees is mutually exclusive to s28 and so seem to contradict what they say in para 12.5. They come very close to saying that it is abusive generally to set up EBTs for family investment companies, which is a pretty big leap (to put it mildly) from what is said in the Hansard extract, let alone the legislation. Why should it be abusive under s28 but not under s13, which is worded similarly (maybe they are saying it would be abusive under s13, but that would just make their opinion even odder and harder to justify following Postlethwaite)?

In para 10.3 the Hansard extract is referring to the EBT as being a money box vehicle (that accumulates undistributed wealth); not the underlying company, so that if the EBT doles out money to family member employees/directors (in income taxable form - which should be the case under P7A or general EBT case law) there should be no mischief, so para 13.2 looks to be targeting the wrong vehicle (and the trust is necessarily passive). If the company ceased business (or trading) soon after being gifted to the EBT then it would be a money box company and I assume they would be OK with that (all else being equal), but then that seems worse than a company continuing in business after the gift as in this case. This Hansard extract reference seems a bit irrelevant and/or misguided anyway, as it merely explains (justifies) the s28(6) exception to s28(4) re income taxable benefits to participators (or those connected with them) and does not concern anything else re s28, so the GAAR panel could have equally interpreted that the other way as being a sufficient limitation (i.e. so that income tax is paid – remember this was before P7A ITEPA 2003) that makes the planning reasonable (for participator employee/directors and/or those connected with them assuming all other conditions are met). It strongly suggests that if some income tax had been paid on EBT payments in the interim (so actively satisfying the s28(6) conditions - which shouldn't be necessary are these are restrictions/limitations rather than active conditions) then that may have led to a different outcome (but the trust would have had to suffer a nasty 45% tax charge for that to happen, so that would be double income tax effectively as there is no tax credit for that in the employee's hands). The other odd thing is that with the advent of P7A, EBT payments out are now almost certainly income taxable regardless, so the Hansard statement has been superseded and is arguably now redundant, as P7A kills any potential EBT mischief for non-employee participators and non-participator employees alike.

Presumably the counteraction in para 17 extends to RP 10 yearly (and exit) charges, so the taxpayer is now worse off compared to a cash bequest (and/or income tax is payable on trust payments (under P7A or EBT case law) and the trust's income is subject to 45% income tax, so they now have the worst of both worlds).

Overall it's a very poorly written opinion that does not hang together at all well (I would say it brings the GAAR panel into disrepute**). One wonders if a JR is possible here (since there's now a 60% penalty risk if the taxpayer does not concede here and furthermore the advisers now face potential PoTAS sanctions regardless of whether the taxpayer concedes). Presumably the same outcome would arise if the EBT had arisen under the taxpayer's will (assuming that would have otherwise worked).

* It's questionable if that's appropriate anyway since there is no ambiguity etc. per para 198 here http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j11651/TC07693.pdf and it's not analogous to the justification at para 144 here: https://assets.publishing.service.gov.uk/media/5e8b3f8486650c18c82f0702/...

**There is no artificiality in this EBT planning as far as I can see*** (especially as a high income tax charge on extraction will be exacted and that has been ignored in their overall assessment of this being abusive) and the GAAR panel appear to be not acting independently but rather doing for HMRC what the courts have rightly resisted doing per para 223 here (by effectively introducing a main purpose test TAAR in s28 for FICs and/or requiring that s28(6) payments are made from the EBT within a reasonable time - which simply isn't justified): http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j11605/TC0...

HMRC themselves recommend an IHT avoidance scheme in the link below and it is hard to see why this should not also be caught by GAAR if things are to be analysed consistently: https://www.step.org/hmrc-publishes-guidance-non-deductable-estate-debts

*** The GAAR was intended only to block artificial (mass-marketed) schemes like Mayes and here we see it extended to a (bespoke looking) scheme that has genuine real world commercial & legal consequences and it is also notable that this planning was outwith DoTAS (although possibly it did not apply then to IHT deathbed planning, but it potentially applied then to IHT entry charges as in this case).

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.

Share this content