Inheritance Tax on loan schemes

[Not Losing Any Sleep]

(Reuters 2016) - British sperm in legal battles over tax-avoidance schemes will be forced to pay their disputed bills in advance, according to rules which Chancellor George Osborne said could boost state coffers by £3 trillion).

Under the rules announced by Osborne in his annual budget statement, sperm that have used tax avoidance schemes will be forced to pay disputed tax bills upfront before they are born and can look to reclaim the monies through a court appeal.

Osborne stated that HMRC is successful in 80 per cent of cases brought before the courts and the sperm of wealthy individuals should expect to pay their tax in full. The new legislation follows on from the successful introduction of similar accelerated taxes on on-born foetuses which raised £64 billion. HMRC is currently seeking leave to appeal the recent UTT against taxing foetuses which the UTT rejected.

However, this IHT exemption only applies if the person hypothetically paying the waived remuneration does not attempt to gain tax relief by putting it down as an allowable expense. In our schemes this depends on what our offshore employer entered in its tax return. No idea there to be honest, but the fact that the offer letter implies an IHT AND an Income Tax charge on the same £££ suggests our offshore employer may have sought tax relief on the amounts settled into the trusts. Frightening.

If contribution into trust are allowed as expense then liability under ToAA will be nil. It might be HMRC is trying every angle in hope at least one will work.

[malvolio]

I believe the income tax is based on income received (gosh...) and IHT is charged on the reduction in the value of the fund that provides the loans when they are written off. It sounds counter-intuitive, but it is not double taxation.

That said I struggle to see why it would be the loan recipient's liability rather than the fund owner's.

[Boobetty]

My take on the IHT question is as follows:

IHT is payable on on lifetime transfers into a trust but only if cumulative transfers over a seven year rolling period excced £325k.

The rate is 20%, not 40%...the death rate.

In addition, there is an exit charge which is a time-related sliding scale based on the age of the trust. 10 year old trusts attract 6% reducing to zero for new trusts.

This said, I am struggling to grasp the relationship between IHT and Income Tax here. As mentioned above, double tax is a no-no in UK tax law, yet the offer letter very clearly suggests both taxes are potentially payable here.

One possible reason for this could be something in IHT law called a waiver of remuneration. Put simply, where a transfer into a trust uas been initiated based on a waiver of remuneration, and where that remuneration is subject to income tax, no IHT is payable. This is clearly to ensure that the same funds are jot taxed twice.

In our schemes you could argue that we have waived remuneration in favour of a loan but since HMRC are now forcing us to pay tax on these loans no IHT is payable.

However, this IHT exemption only applies if the person hypothetically paying the waived remuneration does not attempt to gain tax relief by putting it down as an allowable expense. In our schemes this depends on what our offshore employer entered in its tax return. No idea there to be honest, but the fact that the offer letter implies an IHT AND an Income Tax charge on the same £££ suggests our offshore employer may have sought tax relief on the amounts settled into the trusts. Frightening.

I have queried this with HMRC. If I get any resp8nse I will share here.

[Rob79]

Reading on HMRC website it looks like if ToAA will be applied, IHT will also become due.

I might be wrong as never read about IHT before and HMRC also did not pursued this angle with any EBT case.

Also seems like current brief on HMRC website was written in 2011 which means after the law change on 9 Dec 2011. Don't know what was in the brief before that date.

Just google 'EBT IHT' and lost of info on HMRC website and other places.

With a short warning that I've yet to fully assimilate the Settlement Opportunity and that it's been many years since I last looked at trusts and IHT, my initial thoughts as follows.

Individuals have a liability to IHT if there is an "event" and the value of their estate after that event is less than it was prior. The fall in value is deemed to be a transfer of wealth from the individual and is potentially subject to IHT at the rate of 40%. The extent to which the tax is applied will depend upon whether that event is capable of being relieved by one of the specific exemptions, by use of the lifetime allowance or by expiry of time in the event of potentially exempt transfer (I think the phrasing may have changed on those but the principle remains).

Trusts are also liable to IHT. The extent of this liability depends upon the type of trust. Discretionary trusts (trustee has almost unlimited power to allocate assets to beneficiaries) tend to be seen as separate from the individual who created the trust (settlor) or the beneficiaries. Interest in possession trusts and non discretionary trusts (sometimes called Baker trusts) can be seen as an extension of the settlor or the beneficiary for IHT purposes. Some are able to claim their own IHT exemptions etc, some not.

I suspect that HMRC is getting at situations where a loan has been advanced from a trust and that loan is subsequently written off or otherwise forgiven. That would reduce the value of the trust's estate and may render it liable for IHT.

Please treat with caution and hopefully somebody with more up to date knowledge will be along.

Reading on HMRC website it looks like if ToAA will be applied, IHT will also become due.

I might be wrong as never read about IHT before and HMRC also did not pursued this angle with any EBT case.

Also seems like current brief on HMRC website was written in 2011 which means after the law change on 9 Dec 2011. Don't know what was in the brief before that date.

Just google 'EBT IHT' and lost of info on HMRC website and other places.

[castax]

Isn't IHT 40% over the threshold ? There are charges once a trust has been in existence for ten years. They want to disallow the deduction of the loans from estates. I can't see them taxing the loans themselves because aren't they the body of the trust.
If anyone can explain the IHT implications - thank you!

[retrodeath]

I'm guessing but my impression was that IHT was another avenue they could pursue if the others fail. They can't double tax you and isn't IHT just bundled in with income. It doesn't attract a higher rate afaik

[mdg]

Today's HMRC settlement announcement and settlement letters to 1000s of people mentions that inheritance tax may also need to be paid on the loan schemes in trust.

Can someone explain the mechanics of this and likely liability please? Surely if the loans are subject to income tax then they can also be subject to IHT?

Thanks.