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HMRC internal manual

Inheritance Tax Manual

Employee benefit trusts: property leaving employee benefit trusts: treated as income

Where the property leaving the trust is treated as income for Income Tax purposes there will be no charge under IHTA84/S72 by virtue of IHTA1984/S70(3)(b). This applies where the payment is (or will be) income in the recipient’s hands for Income Tax purposes (or would be if the participator were resident in the UK and subject to Income Tax). This relief will only apply in limited circumstances:

  • it is important that it is the actual payment leaving the trust that is subject to Income Tax.
  • there must be clear evidence, not just a vague possibility, that the payment out will be liable to Income Tax, as suggested by the words ‘or will be’.

For example, if a loan is made to beneficiary and a beneficial loan Income Tax charge arises, the relief does not apply. This is because the actual advance of the loan, which is the payment for IHTA84/S70(3)(b) purposes, is not itself subject to Income Tax. It is the benefit that accrues to the beneficiary that is subject to Income Tax.

Where there is an allocation of funds on sub-trusts (IHTM42970), the relief will only be given where the Income Tax charges occur on the occasion that the funds are allocated to the sub trusts and PAYE and NICs is paid.