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HMRC internal manual

Inheritance Tax Manual

Dispositions by close companies for the benefit of employees

Under IHTA84/S13 (1), a disposition (IHTM04023) by a close company to trustees of an Employee Benefit Trust (IHTM17000) in accordance with terms of IHTA84/S86 (1) is not a transfer of value (IHTM04024) if two conditions are satisfied. They are

  • assets are given to trustees to be held on trust for the benefit of employees in accordance with IHTA84/S86 (1),
  • the persons for whose benefit the assets can be applied include all or most of the persons employed by, or holding office with, the company or one or more of its subsidiaries.

The relief is heavily restricted by IHTA84/S13 (2) which is aimed at confining it to ‘real’ employee trusts. Consequently, IHTA84/S13 (1) will not apply if the trust permits any of the assets to be applied at any time for the benefit of

  • a person who is a participator (an owner or shareholder) in the company making the disposition,
  • any other person who is a participator in any close company that has made a disposition whereby assets became comprised in the same settlement, which would have been a transfer of value where it not for IHTA84/S13,
  • any other person who has been a participator in any such company as is mentioned above at any time, or during the ten years before, the disposition made by that company,
  • any person who is connected (IHTM04442) with any person above.

But these very tight restrictions are relaxed by subsections (3) and (4) which provide exclusions for small participators, for distributions liable to income tax and for profit-sharing schemes under ICTA88/SCH9. A small participator is one who

  • is not beneficially entitled to, or to rights entitling them to acquire, 5% or more of any class of the shares comprised in the company’s issued share capital, and
  • on winding up would not be entitled to 5% or more of the company’s assets.

IHTA84/S13 (5) extends the application to a company which is not a close company.

An equivalent relief for a disposition to an Employee Ownership Trust (IHTM42995) is provided by IHTA84/S13A (IHTM42997).

You should refer any case where an Employee Benefit Trust is in point to Technical in Edinburgh.