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HMRC internal manual

Inheritance Tax Manual

Employee benefit trusts: dispositions by close companies: decision in MacDonald (HMIT) v Dextra [2005] UKHL 47

The ‘Dextra’ decision applies to contributions to employee benefit trusts (EBT) made before 27 November 2002.

In Dextra, the trust deed gave the trustee wide discretion to pay money and other benefits to beneficiaries and power to lend them money. The potential beneficiaries of the trust included:

  • past, present and future employees and officers of the participating companies in the Dextra group,
  • their close relatives and dependants.

The trustee did not make payments of emoluments out of the funds in the EBT during the periods concerned. Instead the trustee made loans to various individuals who were beneficiaries under the terms of the EBT.

The point at issue was whether the company’s contributions to the EBT were ‘potential emoluments’ within the meaning of FA98/S43(11)(a), being amounts ‘held by an intermediary with a view to their becoming relevant emoluments’.

The House of Lords held that the contributions by the company to the EBT were potential emoluments as there was a ‘realistic possibility’ that the trustee would use the trust funds to pay emoluments. This meant that the company’s deductions were restricted. The company could only have a deduction for the amount of emoluments paid by the trustee within nine months of the end of the period of account for which the deduction would otherwise be due. Relief for the amount disallowed would be given in the period of accounting in which emoluments were paid.

The decision in Dextra was made explicit through FA03/S143 and Sch 24 and applies to contributions to EBTs made after 27 November 2002. This prevents a deduction for Corporation Tax purposes until the contribution made for employee benefits is spent by a payment that has been subjected to both PAYE and National Insurance contributions.