HMRC are currently raising further assessments to income tax and national insurance in respect of the loan charge to taxpayers with employment-related ‘disguised remuneration loans’. Taxpayers looking to settle their cases are at risk of a significant liability to inheritance tax charges.
The Potential Inheritance Tax Exposure
Employment-related schemes generally involve the use of an offshore trust. As soon as a trust appears on the scene one has to think ‘capital taxes’. Whilst certain employee benefit trusts are exempt from inheritance tax charges under s.86 IHTA 1984, others, notably employment financed retirement benefit schemes (or EFURB’s) are not, and the usual ten-year and exit charges therefore apply. Many such trusts have clearly already passed or are approaching their ten-year anniversary dates.
The liability for trust inheritance tax charges lies with the trustees, the beneficiaries, and in some limited cases the settlor, under s.201 IHTA 1984.
Where the trustees are offshore HMRC may well assess the UK beneficiaries of the trust instead of the trustees. A simple anti-avoidance measure.
The ten-year tax charge rate is levied at a maximum of 6%, and a beneficiary whose loans may appear insignificant in comparison to the total amounts taken by everyone who participated in their employer scheme might anticipate a low inheritance tax charge. Why? On the basis that it would be shared out amongst everyone proportionately according to their loan amounts. However, s.204(5) IHTA provides that a beneficiary can be liable for the charge up to the total amount of their benefit from the trust, which here means the total amount of the loans they have received from the trust. This means that on settlement the inheritance tax due could be equal to the total loans taken, with income tax, national insurance and interest charges due on top. This is the time for absolute clarity!
Depending on amounts and marginal tax rates, the total tax charge on settlement could therefore end up being 150% or more of the amount actually received from the scheme. This is likely to be the case where other scheme members settled before the ten-year anniversary date, or in some cases have failed to engage with HMRC about their scheme entirely, leaving their shares of the ten-year charge to be split amongst those unfortunate sitting ducks who are now looking to settle.
This disproportionate inheritance tax charge may make a settlement financially unviable leaving them with little choice but to pay the loan charge if they have not already done so and leave their position open with HMRC.
Those affected and their advisers should tread carefully and be absolutely clear on what is being negotiated!
The Background to the Discovery Assessments
The new assessments are being raised under the discovery provisions and relate to amounts that, under the disguised remuneration loan charge rules, should have been declared and tax paid for 2018/2019.
In some cases. further charges are being levied under s.222 ITEPA 2003 on the basis that the tax due under the loan charge should have been paid by the employer under PAYE and, unless the employee ‘made good’ this tax to the employer, grossing up applies. This may be correct if the employer has paid or does pay the loan charge, as effectively the employee has had their tax paid for them and if they don’t reimburse this, they have received a benefit. However, the s.222 charge can still apply where the employer does not meet its PAYE obligations and pay the loan charge and the employee ends up paying the charge themselves.
In many cases, where a settlement has been reached, HMRC have used their collection and management powers to not apply s.222. This may make entering into settlement negotiations seem quite attractive. However, be careful. The benefit of no s.222 charge may be negated by potential inheritance tax charges, especially as HMRC will not conclude a contract settlement here without closing off the inheritance tax position.