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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Employee benefit trusts: conditions for relief: company groups and subsidiaries

Meaning of ‘body’

IHTA85/S86(1) refers to ‘employment by, or office with, a body carrying on a trade, profession or undertaking’. So it follows that the ‘body’ which employs those who may benefit from a trust must, as a matter of economic substance and reality, be carrying on, or be capable of carrying on, a trade, profession or undertaking in its own right.

Depending on the circumstances, the reference to a ‘body’ could include a

  • single company,
  • group of companies or part of a group, or
  • subsidiary within a group.

The ‘all or most’ test (IHTM42915) must then be satisfied with reference to the employees of the ‘body’ concerned.

It should not be difficult to apply the ‘all or most’ test when considering the employees of a single company.

But when dealing with a group of companies, or a trust set up for the benefit of the employees of part of a group or a subsidiary company it is necessary to look carefully at the terms of the settlement to identify which company’s employees can benefit under the trust and then consider whether the company or group of companies concerned may be regarded as a body carrying on a trade, profession or undertaking.

Where the holding company of a group sets up a trust for the benefit of all (or most) of the employees of all the companies in the group, again the application of the ‘all or most’ test should be straightforward. On the other hand, a trust for the benefit of employees of the holding company alone is unlikely to qualify as the company alone could not be said to be a body carrying on a trade, profession or undertaking.

Where the holding company sets up a trust for the benefit of its employees and one or more of its subsidiaries, the first question will be whether or not those companies, viewed as a body, are, or are capable of, carrying on a trade, profession or undertaking. A trust for the benefit of the employees of a holding company and a subsidiary that holds the rights to intellectual property is unlikely to meet the test of a body being able to carry on a trade, profession or undertaking, so that even if the trust was for the benefit of all the employees of the two companies concerned, it is unlikely to qualify under s86.

On the other hand, a trust for the benefit of the employees of a holding company, a trading subsidiary and a subsidiary that holds the rights to intellectual property is more likely to meet the test of a body being able to carry on a trade, profession or undertaking. So even if there were other subsidiaries in the hold company’s group and the employees of the three companies concerned were a minority of the employees of the group as a whole, provided that those companies could be regarded as a body carrying on a trade, profession or undertaking, the trust may qualify under s.86. If the officers of the holding company formed only a minority of all the employees, they could be excluded without risk of losing the exemption. But if the trust was only for their benefit, notwithstanding that the group as a whole qualified as a body carrying on a trade etc, if they formed only a minority of the employees of the group, the trust would not qualify under s86.

It may also be possible for a company to be a holding company of two (or more) subsidiaries that carry on quite different trades - in which case a trust for the benefit of the employees of the group as a whole. Or a separate trust for each subsidiary, either with or without the holding company, may well qualify under s86.

Any case where a trust is created for the sole benefit of a small subsidiary that employs a small number of the group’s employees or company office holders should be looked at critically to see whether the subsidiary itself can be regarded as a ‘body’ carrying on a trade etc. If not, and other companies within the group are part of the arrangements so that together they do qualify as a ‘body’, it will then be a question of whether the employees of the subsidiary meet the all ‘or most’ test, taking into account all the employees and office holders of the companies concerned.

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Two independent companies

A trust for the benefit of the employees of two independent companies would satisfy IHTA84/S86 on the basis that ‘body’ as used in IHTA84/S86(3)(a) includes the plural. But the other conditions of the sub-paragraph must also be satisfied. To satisfy IHTA84/S86(3) the eligible employees would have to include ‘all or most’ of the employees of each company considered separately.