Edge EBT thread

[webberg]

Can someone help with my query... If loan are classed as income than how can HMRC also apply IHT? Isn't this double taxation!

Possibly.

Income tax and IHT have entirely separate codes.

Let's look at IT. Here the key argument is that whatever legal form the transfer of value/cash took from contractee to you, it's effectively income of some description. The case law principles that HMRC want to run require that certain steps and legal forms are ignored in arriving at the analysis that you have received income. Unless that income is exempt in some form, it's taxable on you. These principles (purposive interpretation of the statute applied to realistic view of the facts) are still developing but are hard to overcome.

For IHT, there is no such purposive interpretation. IHT legislation creates a fictional, legal world in which form is still at least as important as substance. In that world, a loan is a loan if the document says so. Therefore a company that employed you, placed funds in a trust of which you are beneficiary. The trust funds are regarded as yours for IHT purposes. You placed those funds outside the trust by making a loan (to you). The value of your estate has therefore fallen potentially, dependent upon your view of the ability to recover the loans.

If the loans are written off, then your estate is permanently reduced and an IHT charge arises. If the loans are repaid and the the trust dissolved, with funds coming back to you, arguably your estate is increased and that will trigger an exit charge (IHT) from the trust.

So not double taxation.

On the one hand you have received disguised income which is subject to income tax (tax on earnings).

On the other you have manipulated your estate, trigger tax charges on your wealth/estate, (tax on capital).

On general principles, paying tax on death on wealth accumulated through post tax income IS double taxation. that however is a matter of political philosophy rather than tax statute.

The above argument is as explained to me by HMRC. I'm not convinced. I think the argument that an analysis for one tax MUST apply to all is powerful and therefore HMRC trying for both taxes is incorrect. Unless HMRC cave on this (I'm trying) expect a litigation.

[Boobetty]

As I understand it, under IHT trust law the funds need to be in trust for 3 months in order for an IHT charge to be triggered subsequently. In contractor loan schemes the funds passed straight through.

HMRC's income tax argument is based on the premise that the loans are a sham. One option is therefore that the loans were written off at the point they were made and hence would not have remained in trust for more than a tax year.

It would appear that the Boyle ruling supports this view:

Para. 105. If we are wrong as to our conclusion above that the loans were an emolument of Mr Boyle’s employment, then further question arises as to whether Mr Boyle is liable to income tax in respect of the amounts received by him as purported loans. Given there was never any evidence that Mr Boyle’s loans were repaid, and no attempt was ever made to repay them, we conclude that they were written off in the tax years in question and therefore s.188(1)(b) applies and the amount written off is to be treated as earnings from the employment for that year.

I would be delighted to get HMRC's view on how the Boyle ruling applies to contractor loan schemes (with the exception of paragraph 105).

[webberg]

As I understand it, under IHT trust law the funds need to be in trust for 3 months in order for an IHT charge to be triggered subsequently. In contractor loan schemes the funds passed straight through.

HMRC's income tax argument is based on the premise that the loans are a sham. One option is therefore that the loans were written off at the point they were made and hence would not have remained in trust for more than a tax year.

It would appear that the Boyle ruling supports this view:

Para. 105. If we are wrong as to our conclusion above that the loans were an emolument of Mr Boyle’s employment, then further question arises as to whether Mr Boyle is liable to income tax in respect of the amounts received by him as purported loans. Given there was never any evidence that Mr Boyle’s loans were repaid, and no attempt was ever made to repay them, we conclude that they were written off in the tax years in question and therefore s.188(1)(b) applies and the amount written off is to be treated as earnings from the employment for that year.

I would be delighted to get HMRC's view on how the Boyle ruling applies to contractor loan schemes (with the exception of paragraph 105).

I'll have to bow to your greater knowledge on whether funds have to be in trust for more than 3 months in order for a charge to stick.

The paragraph you quote is interesting though and probably needs to be read in context. The section quoted taxes employees on the amount of a loan forgiven by an employer. The underlying assumption is that the loan was made to an employee by reason of his/her employment.

Several assumptions there. "Employee", "Employment", "by reason of".

For now HMRC will argue that the cases are likely to be appealed and that their Spotlight will stay as it represents their opinion.

[Michael J Perry FCA]

iNHERITANCE TAX UPDATE

As I understand it, under IHT trust law the funds need to be in trust for 3 months in order for an IHT charge to be triggered subsequently. In contractor loan schemes the funds passed straight through.

HMRC's income tax argument is based on the premise that the loans are a sham. One option is therefore that the loans were written off at the point they were made and hence would not have remained in trust for more than a tax year.

It would appear that the Boyle ruling supports this view:

Para. 105. If we are wrong as to our conclusion above that the loans were an emolument of Mr Boyle’s employment, then further question arises as to whether Mr Boyle is liable to income tax in respect of the amounts received by him as purported loans. Given there was never any evidence that Mr Boyle’s loans were repaid, and no attempt was ever made to repay them, we conclude that they were written off in the tax years in question and therefore s.188(1)(b) applies and the amount written off is to be treated as earnings from the employment for that year.

I would be delighted to get HMRC's view on how the Boyle ruling applies to contractor loan schemes (with the exception of paragraph 105).

That is a good observation and probably why HMRC are currently treating the loans as income under the Transfer of Assets abroad legislation rather than as PAYE Income. HMRC have now changed their stance on IHT for Edge and a number of other schemes and now say that the trust qualifies under Section 86 Inheritance Tax Act 1984 which means that no periodic or exit charges will apply. However, if the loans are written off, an IHT charge could arise which brings us back to your point. With regard to Boyle generally, HMRC do not need to quote it to enable them to issue an Accelerated Payment Notice, as Edge was DOTAS registered.

[Boobetty]

Forgive me, but I don't think HMRC have changed their stance. I think they may simply have omitted IHT from their calculations for the Settlement Opportunity, but this removes the promise of 'finality' because they reserve the right to pursue us for IHT at some point in the future.

To clarify, s86 trusts still have periodic and exit charges just like non s86 compliant trusts but at slightly different rates. Exit charges are triggered exclusively by the loan write off, which was previously an assumption that HMRC were using when bringing IHT into the SO equation. The only change of stance is that they currently cannot be @rsed to work out the IHT element.

As far as APN's go they cannot possibly include IHT because they cannot necessarily assume loans have been written off.

I may, however, be completely wrong on this last point and look forward to standing corrected.

[Michael J Perry FCA]

APN's

Forgive me, but I don't think HMRC have changed their stance. I think they may simply have omitted IHT from their calculations for the Settlement Opportunity, but this removes the promise of 'finality' because they reserve the right to pursue us for IHT at some point in the future.

To clarify, s86 trusts still have periodic and exit charges just like non s86 compliant trusts but at slightly different rates. Exit charges are triggered exclusively by the loan write off, which was previously an assumption that HMRC were using when bringing IHT into the SO equation. The only change of stance is that they currently cannot be @rsed to work out the IHT element.

As far as APN's go they cannot possibly include IHT because they cannot necessarily assume loans have been written off.

I may, however, be completely wrong on this last point and look forward to standing corrected.

You are correct that the APN will only include the Income Tax which HMRC says is due on the loans being treated as UK taxable income.

[meanttobeworking]

Am I right in thinking the threat of IHT is only present (regardless of likelihood) if total loan is in excess of the IHT threshold of circa £300,000?

[Iliketax]

Forgive me, but I don't think HMRC have changed their stance. I think they may simply have omitted IHT from their calculations for the Settlement Opportunity, but this removes the promise of 'finality' because they reserve the right to pursue us for IHT at some point in the future.

To clarify, s86 trusts still have periodic and exit charges just like non s86 compliant trusts but at slightly different rates. Exit charges are triggered exclusively by the loan write off, which was previously an assumption that HMRC were using when bringing IHT into the SO equation. The only change of stance is that they currently cannot be @rsed to work out the IHT element.

As far as APN's go they cannot possibly include IHT because they cannot necessarily assume loans have been written off.

I may, however, be completely wrong on this last point and look forward to standing corrected.

I think that there are two potential issues with IHT. The first is when the payment leaves a close company. The transfer of value will then be apportioned among the individual/trustee participators and will be a chargeable lifetime transfer. This is where the IHT threshold comes in. I think HMRC is potentially wrong on this one for a couple of reasons. First if it is remuneration like HMRC says then it is deductible for CT and so not a transfer of value. There can be complications when the payment is in a different period to the accounting expense but, I guess, with PSCs that would be unusual. The second is that BPR may be available (see Nelson Dance and HMRC's manuals).

The second is where value leaves as s86 trust otherwise than by means of a payment. From memory, that is s72(2)(c). That would potentially be in point in a loan waiver but would depend on circumstances.

For the avoidance of doubt, IHT is specifically within the scope of the APN regime.

[TheHat]

Lack of finality of Settlement Opportunity

Forgive me, but I don't think HMRC have changed their stance. I think they may simply have omitted IHT from their calculations for the Settlement Opportunity, but this removes the promise of 'finality' because they reserve the right to pursue us for IHT at some point in the future.

To clarify, s86 trusts still have periodic and exit charges just like non s86 compliant trusts but at slightly different rates. Exit charges are triggered exclusively by the loan write off, which was previously an assumption that HMRC were using when bringing IHT into the SO equation. The only change of stance is that they currently cannot be @rsed to work out the IHT element.

As far as APN's go they cannot possibly include IHT because they cannot necessarily assume loans have been written off.

I may, however, be completely wrong on this last point and look forward to standing corrected.

The discussion on whether HMRC has or hasn't changed its stance on IHT feels a mute point to me. The key point is that the Settlement Opportunity no longer allows finality on this sorry saga.

Those of us who had just about made our minds up to take the Settlement Opportunity, to put 'things to bed', now have to rethink and consider whether its worth it when there is no finality. It doesn't sound such an 'opportunity' anymore when only one party (i.e. us) is legally bound by the settlement.

[EBTContractor]

Those of us who had just about made our minds up to take the Settlement Opportunity, to put 'things to bed', now have to rethink and consider whether its worth it when there is no finality. It doesn't sound such an 'opportunity' anymore when only one party (i.e. us) is legally bound by the settlement.

This is exactly why I archived their last brown envelope where the sun doesn't shine - you can't trust those clowns!