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HMRC internal manual

Inheritance Tax Manual

Employee benefit trusts: dispositions by close companies: dispositions allowable in computing profits for Corporation Tax

Guidance on the general application of IHTA84/S12 is at IHTM04191. Broadly a disposition is not a transfer of value if the disposition is allowable for the purposes of calculating the transferor’s Corporation Tax (CT). The words ‘is allowable’ are in the present tense and can only be satisfied where the contribution to the EBT is allowable as a deduction against CT for the tax year in which the contribution is made.

A deduction in the CT accounts can be permanently disallowed by the following:

  • capital expenditure disallowed by ICTA88/S74(1)(f) & CTA09/S53,
  • expenditure not wholly and exclusively incurred under ICTA88/S74(1)(a) and CTA 09/S54.

If expenditure is not allowable for any of these reasons then IHTA84/S12 cannot apply.

However, the timing of a deduction can be deferred to a later period by the following:

  • generally accepted accounting practice (UITF32) which capitalises contributions to an EBT by showing them as an asset on the company’s balance sheet until and to the extent that the assets transferred to the intermediary vest unconditionally in identified beneficiaries
  • expenditure subject to FA89/S43, the ‘Dextra’ decision (IHTM42959), and
  • from 27 November 2002 onwards, expenditure subject to FA03/Sch24 and CTA09/S1290(2) and (3). Under these provisions, where a qualifying benefit is provided from the EBT during or within nine months of the end of the accounting period in which the contribution was made, then a CT deduction is still allowed for the tax year in which the contribution was made and IHTA84/S12 can still apply. But if a qualifying benefit is provided later on it will be allowed as a CT deduction only in that later tax year. A qualifying benefit includes a payment of money or transfer of assets which gives rise to an employment income and NICs charge, and, following the introduction of ITEPA03/Pt7A, the taking of a relevant step on or after 6 April 2011.

So if a contribution to an EBT is not initially allowable as a CT deduction within the same tax year, it will be necessary to see whether or not a qualifying benefit is provided from the EBT within the nine month period so that the CT deduction is given. If a qualifying benefit is provided outside of this window, although there may be a CT deduction for a later year, IHTA84/S12 cannot apply.