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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Employee benefit trusts: interaction with the ‘disguised remuneration’ legislation

As explained at IHTM42986, Inheritance Tax is not charged where the payment out of an employee benefit trust (EBT) is, or will be, income in the recipient’s hands. A similar relief is provided by IHTA84/S65(5)(b) where property is leaving a relevant property trust and where property leaves a sub-trust (IHTM42970) which does not satisfy the provisions of IHTA84/S86.

It is important to note the tenses used in both these sections - Inheritance Tax will not be due only where a payment ‘is or will be’ income. Where an amount exiting a trust is at that time subject to Income Tax (or would be if that person was resident) this relief may apply. But where an amount is subject to an earlier Income Tax charge that is only being paid now, the relief will not be available.

This is an important distinction to note when considering the interaction of IHTA84/S65(5)(b) and ITEPA03/Part 7A - the disguised remuneration legislation.

Broadly this legislation raises an Income Tax charge from 6 April 2011 under ITEPA03/Part 7A/S554B on a ‘relevant step’ where property is lent or earmarked for the benefit of an employee through a third party, such as an EBT. A further Income Tax charge can also arise under ITEPA03/Part 7A/S554C when the property actually leaves the trust.

Where:

  • Income Tax has been paid on, for example, an allocation to a sub-fund, in previous years under S554B, and
  • an agreement has been reached between the taxpayers and HMRC that ITEPA03/Part7A/Para 59 applies,

the amount of the charge under S554C when the property leaves the trust is reduced. This means that value of property leaving the trust that is equal to the reduction is not treated as income at the time it leaves the EBT so the relief under IHTA84/S65(5)(b) will not be available on this amount. If the charge under S554C is reduced to nil there will be no relief under IHTA1984/S65(5)(b) on the property leaving the trust.

Where:

  • an employee benefit trust is wound up, and
  • Income Tax has not been previously paid, and
  • the entire amount is now treated as employment income for the purposes of Part 7A ,

relief under IHTA1984/S65(5)(b) will be available to the full extent that the amount is subject to Income Tax as employment income.

It some cases an apportionment may be required as some of the property exiting the trust may be income at that time and some may not.