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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Employee benefit trusts: Inheritance Tax operation: the reliefs given when a trust qualifies under IHTA84/S86

The main benefit for a trust that qualifies as an employee benefit trust (EBT) is given by IHTA84/S58(1)(b) under which the settled property is not relevant property (IHTM42161) for Inheritance Tax purposes and so is excluded from the charges that would otherwise apply. It follows that property held in a qualifying EBT is not subject to the ten-year anniversary charges. However, protection from relevant property trust charges is often lost where the settled property has been appointed on sub-trusts (IHTM42970).

Guidance on the taxation of property leaving an EBT is at IHTM42981.

Under IHTA84/S86(4)(a) the property in an EBT is to be treated as comprised in one settlement whether or not that would otherwise be the case. This avoids the administrative complexity that would arise if a large number of employees of a firm made contributions to the settlement and each had to be regarded as the settlor of a separate settlement by virtue of IHTA84/S44(2)IHTA (IHTM42232).

As IHTA84/S86(1) only applies ‘during a period’ that the trust qualifies under those provisions, the treatment as one settlement does not continue after the trust ceases to satisfy the conditions of IHTA84/S86(1)and(3)(although it may not then be easy to unscramble the situation that previously existed and identify the funds that are attributable to each individual settlor). 

Under IHTA84/S72, property can leave an EBT with no charge to tax where:

  • it is an absolute payment to a person other that a settlor or a participator, or anyone connected with them, or
  • the settled property is then held on permanent charitable trusts.