Edge EBT thread

[TykeMerc]

I think the point the poster was asking about is, if they are claiming it is income (and charging interest on it which is the charge for having benefit of it), then how can there be an inheritance tax charge as for tax purposes, there never was a loan (this is what HMRC are claiming, but not what I believe).

I two am confused on how they can apply IHT on this as it seems like plain double taxation. It is I guess one of the reasons the "settlement offer" seems so unappealing.

In truth doesn't Inheritance Tax amount to being a double tax in the long run? It always has been as it's applied to assets/cash acquired with taxed income.

I'm speculating here (Webberg and other experts will have a better bead on this), but I suspect that HMRC's "argument" may be that since you've had the benefit of what they regard as income, but because the value can't be tracked through to your asset base, at the time of your death, they will treat the income as liable for Inheritance Tax and track it on your tax account.
It feels like a rather large stretch to me, but it's the only way I can rationalise it. If the argument is along those lines then frankly it seems specious at best and it feels more punitive than anything. If nothing else if your estate isn't over the Inheritance Tax threshold at your death how can the money associated with these loan schemes be liable? Seems rather irrational to me.

I of course could be wildly off beam, but I've not heard a reason as to why you might be liable for Inheritance Taxes on these loan schemes.

[SimonJones]

IHT

I also don't understand this IHT. I have previously queried this but have not received a convincing answer.

In essence, what HMRC are saying, since there is a trust in place IHT is due on write-off the loans.

A friend on mine was on a scheme exactly same as ours with a difference of, there was no trust involved. Obviously, he's settlement was final and he decided to settle. In our case, settlement does not make sense at all as it's not final.

I agree, with the previous posters, that this sounds like double taxation.
How can one treat "loan as income" on one hand and "loan" on the other hand at the same time. Surely, is one or the other and not both. Should HMRC pursue the income route as they are, than these trusts have NO meaning and should be treated as one.

[webberg]

Once again I'll go over this.

Income tax is charged in income. This is an annual tax on annual income.

In your cases, HMRC is arguing that despite the legal form of the cash to you being a loan, the substance is that it's a payment of salary or profit which is annual income.

There is precedent for the substance of a transaction, based on the facts in context, to be the basis of taxation. There is NOT direct precedent for this is contractor schemes (yet).

This analysis applies for INCOME TAX.

Inheritance tax is charged on wealth. It says that if you transfer your wealth (accumulated of course from post tax annual income) to another person, then subject to various exemptions, you must pay tax. We are probably all familiar with the potential charge on transfer of property and assets on death. However if you place assets outside your estate in life, there is also a charge.

The charge is based upon the reduction in the value of your wealth after the event. In the case of assets placed into trust which may eventually benefit you later in life, or a beneficiary upon your death, the tax charge is usually based on annual values and/or anniversary charges every 10 years. It depends on the trust type.

Inheritance tax is much more "legalistic" than income tax. The law creates a hypothetical world of wealth taxation and in that world form is more important that substance. There is no precedent in IHT for substance over form.

Thus a loan in legal form, is a loan for IHT purposes.

So is this double taxation? Technically no, but taxing income and then wealth created from untaxed income might be depending on your viewpoint.

Is it fair for a loan to be taxed as income for one tax and not for another? Probably not and in a joined up system, would not be, but we don't have a joined up system.

What can you do about it? Get organised, get advice.

[webberg]

A comment on the tax debt now that you operate via a limited company.

YOU owe HMRC money under the APN for a scheme YOU did some time ago. That is your debt to HMRC.

The company you now operate through and own, is a separate legal entity and did not do the scheme and does not owe HMRC.

If the company pays the debt for you and you are owner/employee/director, you have benefited from the company assets and will be taxed on that AND you will have to repay the company.

You cannot sell something to owe to another to a company.

[Dylan]

Which is a shame as I was going to buy a Ferrari on finance and sell the debt to my company

[tax is taxing]

Because they are not concerned with logic as much as following their master's directive of "maximizing the amount of tax collected"?

Think of it as a "heads I win, tails you lose" kind of proposition.

Hi Dotas Scandal,

I read your Post / Blog column at FT weekend. Many thanks for keeping it on the public.

Really appreciate it.

[Dylan]

Hi Dotas Scandal,

I read your Post / Blog column at FT weekend. Many thanks for keeping it on the public.

Really appreciate it.

Link please?

[webberg]

Which is a shame as I was going to buy a Ferrari on finance and sell the debt to my company

Excellent - can you buy me one as well please and just lose it in the roundings?

[SimonJones]

Once again I'll go over this.

Income tax is charged in income. This is an annual tax on annual income.

In your cases, HMRC is arguing that despite the legal form of the cash to you being a loan, the substance is that it's a payment of salary or profit which is annual income.

There is precedent for the substance of a transaction, based on the facts in context, to be the basis of taxation. There is NOT direct precedent for this is contractor schemes (yet).

This analysis applies for INCOME TAX.

Inheritance tax is charged on wealth. It says that if you transfer your wealth (accumulated of course from post tax annual income) to another person, then subject to various exemptions, you must pay tax. We are probably all familiar with the potential charge on transfer of property and assets on death. However if you place assets outside your estate in life, there is also a charge.

The charge is based upon the reduction in the value of your wealth after the event. In the case of assets placed into trust which may eventually benefit you later in life, or a beneficiary upon your death, the tax charge is usually based on annual values and/or anniversary charges every 10 years. It depends on the trust type.

Inheritance tax is much more "legalistic" than income tax. The law creates a hypothetical world of wealth taxation and in that world form is more important that substance. There is no precedent in IHT for substance over form.

Thus a loan in legal form, is a loan for IHT purposes.

So is this double taxation? Technically no, but taxing income and then wealth created from untaxed income might be depending on your viewpoint.

Is it fair for a loan to be taxed as income for one tax and not for another? Probably not and in a joined up system, would not be, but we don't have a joined up system.

What can you do about it? Get organised, get advice.

Thank you for the response.

As HMRC are classing the "loan" as artificial, than shouldn't the "trust" deemed artificial as well?

[webberg]

Thank you for the response.

As HMRC are classing the "loan" as artificial, than shouldn't the "trust" deemed artificial as well?

No.

A loan document deals with a transfer of money and the terms and conditions attached to that. Relatively simple and very flexible and easy to manipulate.

For example can anybody explain convincingly the difference between a loan and deposit account? Both have very similar characteristics depending on whose perspective you view them from. This is a favourite trick question in banking exams.

Given the legal and defintional flexibility of loans, it's often actually easier to look at the circumstances and context of the transaction to determine its true nature.

A trust operates in a very legally defined way with real penalties, obligations, rights and responsibilities for the parties - trustee, settlor, beneficiary, etc. This is necessary when you reflect on the meaning of the word used to define the arrangement - "TRUST".

It's way harder to allege that a trust does not really exist, than to allege a loan is something else.

In fact it's probably easier for HMRC to say that a trust exists in the facts and context of a set of circumstances, even if no formal deed has been written. This is essentially what they tried in Jones v Garnett (Arctic Systems) and failed to do, thankfully.