We reported in August last year following HMRC’s reminder (released on 14 August 2014) that the time to settle under the Employee Benefit Trust Settlement Opportunity (EBTSO) is running out. The deadline of 31 March 2015 is just over two months away and it is predicted that a considerable number of people who instigated the planning have chosen not to enter into the arrangements. Is this a wise move?
The EBTSO is an “opportunity” based on the taxpayer accepting the law despite case law history being incorrect. Some may therefore regard the opportunity as a little optimistic by HMRC that they will eventually turn the courts in their favour. Given the track record – an acclaimed 80% win for HMRC, the optimism may be well founded. However, it may have been fairer to succeed at the courts and then offer the opportunity. Now that the EBTSO is coming to an end, it is unlikely that HMRC will offer favourable settlement terms if they win or be kind to those choosing to negotiate a settlement post March. Why? Well simply, if HMRC do not penalise those who established Employee Benefit Trusts (EBT) with loan arrangements comparatively to those who entered the EBTSO, no taxpayer is likely to take any future settlement opportunities seriously.
Given the likelihood that an EBT will either come to an end or the recipient of a loan will die at some point, there appears to be some serious scope for making either event very uncomfortable for the taxpayer. Whilst it is purely speculative, there seems to be enough momentum in HMRCs campaign against EBTs to introduce some nasty legislation. Maybe some of the following will feature in future budgets whether or not HMRC succeed at the courts:
- A new tax treating loans from EBTs as remuneration linking back to the last year of employment would be an easy measure to implement. The law could for example come into effect to tax loans from EBTs in their entirety within a prescribed future tax year. This type of legislation has been rare although we have seen retroactive legislation previously: the pre-owned asset tax being one that rippled shock waves through the tax profession in 2004.
- Beneficiaries or EBTs in receipt of benefits or having allocated sub funds could be subject to an supplementary charge on the tax rate applied for each year distributions are not made. This is similar to the tax charge introduced to non-settler beneficiaries of offshore trusts where the trust realises gains.
- The trustees of EBTs could be faced with an increased tax rate on income and gains realised within the trust. Currently trustees in receipt of UK source income are subject to the rate of tax applicable to trustees (currently 37.5% or 45%). The normal way of avoiding this would be to hold income bearing investments through offshore companies although, if new legislation were being written, maybe HMRC would choose to introduce a look through provision (similar to those implemented by other tax jurisdictions – all in the spirit of international alignment).
- Denial of any debt being offset against the estate for Inheritance Tax (IHT) purposes is a high contender given changes introduced by Schedule 36 of the Finance Act 2013 require the debt to actually be discharged by the estate. HMRC have obviously considered the position of debts within the estate and therefore it is suspected that some technical chap at HMRC is itching to write some new legislation.
- Amending the provisions of S86 IHTA 1984 to specifically deny that all or certain EBTs are outside the scope of IHT could also be a potential amendment. Certainly HMRC has been challenging whether the trust deed of an EBT means it is protected by S86: this is clear in the guidance accompanying the EBTSO as well as being seen in practice.
Reliance on case law being successful may be a foolish move if it is anticipated that HMRC are sufficiently disgruntled with the use of EBTs. History has seen HMRC introduce new laws where they are unhappy with the tax treatment especially if proven by case law. For example, it was once possible to obtain a corporate tax deduction for contributions to EBTs. It was proven in the courts. The practice was proven and then the law changed.
Maybe those employers who used an EBT before 6 April 2011 and have not considered entering the EBTSO should have another think. Whilst the content of this article speculates on what counter measure may be introduced, it would appear that counter measures would mark the difference for those entering the opportunity and those who do not with absolute clarity.
An employer must notify HMRC by 31 March 2015 if they wish to take advantage of the EBTSO.
HMRC will treat an employer notifying them of a wish to settle after 31 March 2015 differently:
“HMRC will continue to settle appeals by way of agreement where appropriate but not on the beneficial terms of the EBTSO. Our expectation is that this will mean an increase in the amount on which HMRC is prepared to settle and which, in some cases, could be significant.”