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HMRC internal manual

Inheritance Tax Manual

Employee benefit trusts: specific schemes: approved profit sharing schemes

‘All or most’ test

IHTA84/S86(3)(a) requires that an employee benefit trust is open to ‘all or most’ of the employees of the company or body concerned (IHTM42915).

TA88/Sch9 contained reliefs from Income Tax and Capital Gains Tax for approved profit sharing schemes. The provisions for approval allowed membership of an approved scheme to be restricted to full time employees with 5 years service. In this way, it was possible for a profit sharing scheme to be approved even though less than the majority of all the company’s employees were able to join. This would be particularly relevant in the case of a new company. To remove any doubt as to whether or not approved profit sharing schemes met the ‘all or most’ test, IHTA84/S86(3)(b) was added by FA82. As a result these approved schemes automatically satisfy IHTA84/S86.

Close company profit sharing scheme

IHTA84/S13(2) restricts the exemption in IHTA84/S13(1) for dispositions made by a close company (IHTM42960).

However, in determining whether that restriction applies, you should ignore any power in the trust to appoint shares to participators under a profit sharing scheme approved under TA88/Sch9 in view of IHTA84/S13(4)(b). So, if such a power exists, it does not restrict the exemption given by IHTA84/S13(1).

Appropriation of shares

Usually, an appropriation of shares under an approved profit sharing scheme means that the shares cease to be settled property. Where that appropriation was to a participator, a charge would normally arise in view of IHTA84/S72(3)(b). But where the trusts are an approved profit sharing scheme, IHTA84/S72(4) prevents a charge from arising.