Employee Benefit Trust (EBTs)

Anyone with a loan outstanding to an EBT needs to carefully consider what action to take regarding the outstanding loan.

Doing nothing is not an option.

There are some key issues that need to be addressed. In particular, the Inheritance Tax (IHT) issues surrounding EBT trust loans need to be fully understood.

If you have settled with HMRC and wish to write off the outstanding loan there still may be an issue.
Whilst you have agreed a settlement with HMRC there may still be an IHT issue where the EBT loans have not yet been written off.

If you have not settled with HMRC but the EBT loan was subject to the Loan Charge.
In certain circumstances, where settlement had not been agreed with HMRC, the EBT loan had to be declared and taxed under Self Assessment. However, this does not mean that this is settled with HMRC and HMRC can still pursue further tax and national insurance, as well as, potentially, IHT.

You were not subject to the Loan Charge and my EBT is still in existence, are you in the clear?
EBT loans taken out before 9 December 2010 were not subject to the Loan Charge, nor were loans taken out between 9 December 2010 and 5 April 2016 if the arrangements were fully disclosed to HMRC.

For individuals and companies in this position, the natural inclination would have been to let sleeping dogs lie, as HMRC could not actively pursue any tax and national insurance liabilities.

The EBT loan can be left outstanding and simply written off on death without any tax charges. However, in the meantime there are other issues that need to be considered.

1. Trustees fees. The trust administrator of the EBT may issue fees for trustee services year on year. This could add up to tens of thousands of pounds in fees over a long period of time.
2. EBT loan assigned by the trustees to a third party loan company. The trustees may sell the EBT loan to a third party who then will seek repayment of the loan (usually at a discount). This means the individual may end up paying tax on the full amount of the loan but will get no relief for any of the loan that is repaid.
3. HMRC’s view is that these trusts are subject to various IHT charges.

So what are your options and how can ETC Tax help?

Reduce trustee fees.

Most, if not all, EBTs are situated offshore (typically in the Isle of Man or Channel Islands).

You should first of all consider migrating the trust to the UK – the trustee fees will usually be much lower and there are unlikely to be any tax issues since the trust will have no income producing assets.

There are also technical arguments against the IHT charges HMRC is seeking to impose.

Ten Year Charges (TYCs)

HMRC’s view is that the value to be include in the TYC calculation is the face value of the original loan. We can assist in putting forward constructive arguments to HMRC that much lower valuations should apply.

Exit charges

We are seeing many cases where HMRC is seeking an IHT exit charge when EBT loans are written off. We believe that HMRC’s interpretation of the legislation in this area is incorrect and we can arrange appeals against any assessments raised and correspond with HMRC.