Loans from EBTs and other Trusts

[RockTheBoat]

That would be silly in the extreme. They want to see where the loan was spent. But hey, it's your funeral (or at least, your court case).

not really sure if thats the case. People can take out loans for any reason. Hey if I take out a loan at zero interest and then put it into my mortgage or whatever, its my business and none of Hectors.

what they are probably looking for is
1. where did they come from (i.e. not for the same source as the consultants income)
2. and how often (which is probably the angle they are gunning for. i.e. wow, you are taking loans every month... etc).

Again, people need to realise this is not Tax Avoidance, but merely tax deferral or Income mitigation for use of a better word.

and lastly, considering that most of these schemes will have some form of signed loan agreement, im not really sure how Hector is going to say that they are not.

[malvolio]

and lastly, considering that most of these schemes will have some form of signed loan agreement, im not really sure how Hector is going to say that they are not.

I suggest you go away and Google for the Ramsay Principle before you rely on advertorials...

[RockTheBoat]

I suggest you go away and Google for the Ramsay Principle before you rely on advertorials...

did so,
"In summary, companies that had made substantial capital gains had entered into complex and self-cancelling series of transactions that had generated artificial capital losses, for the purpose of avoiding capital gains tax. The House of Lords decided that where a transaction has pre-arranged artificial steps that serve no commercial purpose other than to save tax, the proper approach is to tax the effect of the transaction as a whole."

I can see a few holes already where the EBT etc schemes would not not fall under this (esp in the fact that there are no cancelling transactions or removal of tax liability), but I guess this will be one for the scheme lawyers and Hector to fight out.

[malvolio]

did so,
"In summary, companies that had made substantial capital gains had entered into complex and self-cancelling series of transactions that had generated artificial capital losses, for the purpose of avoiding capital gains tax. The House of Lords decided that where a transaction has pre-arranged artificial steps that serve no commercial purpose other than to save tax, the proper approach is to tax the effect of the transaction as a whole."

I can see a few holes already where the EBT etc schemes would not not fall under this (esp in the fact that there are no cancelling transactions or removal of tax liability), but I guess this will be one for the scheme lawyers and Hector to fight out.

You needed to read a little further. The practical application of Ramsay is that Hector is at liberty to disregard any business construct that does not have a business-related justification. So a loan to an employee that is used to pay personal expenses that would normally be covered by earned income would certainly be in scope.

The logic begin the 9th December changes is to make the selling of EBTs as a tax avoidance vehicle no longer viable. However, there is nothing to stop Hector pursuing any individual for taxes on loans under existing rules; other than the small question of manpower of course.

[IR35 Avoider]

Under EU law, restrospective legislation is banned

I used to believe this, but apparently tax law is an exception. (i.e. retrospection is specifically allowed for tax law.)

[pastalista]

Manpower

You needed to read a little further. The practical application of Ramsay is that Hector is at liberty to disregard any business construct that does not have a business-related justification. So a loan to an employee that is used to pay personal expenses that would normally be covered by earned income would certainly be in scope.

The logic begin the 9th December changes is to make the selling of EBTs as a tax avoidance vehicle no longer viable. However, there is nothing to stop Hector pursuing any individual for taxes on loans under existing rules; other than the small question of manpower of course.

That question of manpower doesn't really matter. Hector can take as long as he likes to pursue the investigation, so long as they inform you that they are questioning your tax return. They can question each tax return each year it comes in and eventually hit you for the total, plus interest, plus penalties for anything you haven't disclosed (and of course, you won't have disclosed the EBT element).

Although, as you say, Hector can "look through" any contractual arrangement anyway, the 09/12 date just makes it simpler for them.

I've just been speaking to one of the providers of the "new" loans and they are absolutely convinced that their offering is not "in any way, shape or form" affected by the 09/12 announcement. I asked them about Ramsay and they said, and I particularly liked this, "it doesn't apply here". I asked how that was so and they suddenly had to get "someone who knows more about this" to discuss it with me.

Still waiting for the phone to ring. I'm just guessing I may be waiting for some time.

Pastalista

[prozak]

.....In other words, there is always a tax liability, you just defer paying it.

Yes. This is the case. Always has been as far as I can tell.

Anyone who enters a loan scheme and thinks otherwise hasn't understood the scheme.

The EBT's that I have seen you have to keep rolling over the loan. If you choose not to roll over the loan the trust will make it a disbursement instead - Taxable Event.

You can ask them to close the loan - Taxable Event.

So always there is a loan and always there is a taxable event if the loan ceases.

Unless you decide to repay the loan and have the cash sitting in the Trust.

[BlasterBates]

I suppose if you don't need the loan, paying back the loan when HMRC comes sniffing would be a bonnafide way of getting him off your back at least for a while.

In fact I can see here that if you let the EBT accumulate and you receive absolutely nothing, no loan and then after 10 years go overseas and ask for it to be disbursed, could that be legal.

I know for a fact that it is not acceptable in other countries because they tried it and it failed. The authority would argue that the Trust is your income and should be taxed as such. But I do get the impression under UK law that is OK, otherwise there would be no loan schemes, and they've only closed the loophole on loans.

[Emigre]

You needed to read a little further. The practical application of Ramsay is that Hector is at liberty to disregard any business construct that does not have a business-related justification. So a loan to an employee that is used to pay personal expenses that would normally be covered by earned income would certainly be in scope.

Mal, I think I have to disagree with the conclusion.

A loan is not income. If some loans are to become so, where is the line to be drawn? A loan as an employee from an EBT will be taxed as a BIK, and will so each year until repayment, at which point if it is then returned to the beneficiary will be taxed as some form of income.

A loan to an individual from an FBT where there is no employment relationship would not be taxed as a BIK. It is still a loan and repayment is expected. If this loan is to be treated as income today I assume that the repayment of it will become eligible as an allowable expense in the future?

The practicalities of treating a loan as a form of income are close to unworkable. What one does with a loan is irrelevant, whether its to buy a house, or to put the grocery shopping on the credit card. As I understand it, most of the population, following the example of the last Govt, have been living beyond their means for many years - it is actually the norm.

A loan is exactly that, a loan. It will require repayment at some future date. It is not income.

Emigre

[malvolio]

Mal, I think I have to disagree with the conclusion.

A loan is not income. If some loans are to become so, where is the line to be drawn? A loan as an employee from an EBT will be taxed as a BIK, and will so each year until repayment, at which point if it is then returned to the beneficiary will be taxed as some form of income.

A loan to an individual from an FBT where there is no employment relationship would not be taxed as a BIK. It is still a loan and repayment is expected. If this loan is to be treated as income today I assume that the repayment of it will become eligible as an allowable expense in the future?

The practicalities of treating a loan as a form of income are close to unworkable. What one does with a loan is irrelevant, whether its to buy a house, or to put the grocery shopping on the credit card. As I understand it, most of the population, following the example of the last Govt, have been living beyond their means for many years - it is actually the norm.

A loan is exactly that, a loan. It will require repayment at some future date. It is not income.

Emigre

And I disagree with your disagreement... Sorry.

Firstly, under Ramsay Hector can assess your taxation on the benefit to you of having free access to the loaned amount. It's no different to the usual case of where do you draw the line with a BIK.

Secondly, let's assume you repay your final loan of , say, £100k for the year. Fine, no tax due. However you are now liable for tax on the previous loans you haven't had to repay. Plus, where does the money come from to repay the loan if you've been using it to pay for your mortgage? Do you take out another loan...?

Finally the new rules are very clear. Any income of any kind, even if it's a case of '61 Latour you can sell to someone else, will be treated as earned income and taxed accordingly at year end.