The 31 May deadline for registering interest in discussing settlement with HM Revenue and Customs (“HMRC”) is fast approaching. For many, these legacy arrangements are a continuing problem involving accruing interest charges on outstanding loans, future inheritance tax ("IHT") reporting obligations and charges as well as causing issues for owner managed businesses looking for a buyer.
For those with legacy Employee Benefit Trusts (“EBTs”) arrangements that are still unresolved, registration means the opportunity to settle with HMRC on a basis that taxes amounts historically. This can be beneficial in some circumstances depending on annual tax rates and individual fact patterns. Other options to wind up arrangements include triggering a current year charge under ‘Disguised Remuneration’ legislation and reporting this – both from an individual perspective and via company payroll. If choosing to do nothing however, beneficiaries with outstanding loans will be subject to the April 2019 loan charge as well as ongoing ten year IHT charges arising on the Trustees in the future.
When registered for settlement discussions, either as an employer or as an individual beneficiary, HMRC will expect provision of the underlying facts and dialogue about tax calculations to be completed by September 2018. It is only after these discussions that a settlement agreement can be finalised and becomes binding. In cases of financial hardship, HMRC are also willing to negotiate payment over longer terms.
Beneficiaries who are now resident in other countries will have to pay particular attention to the local tax impact of any actions to wind up an EBT – it is important to obtain the correct advice to avoid triggering a tax charge in a different jurisdiction without being able to obtain relief for the corresponding UK tax charge.
Whatever the circumstances, now is the best time to obtain advice and understand options for resolving EBT arrangements (or the implications of continuing them).
Frank’s company settled £200,000 into an EBT in 2000 and it was allocated to a sub-fund with Frank as the beneficiary. Frank took a £200,000 loan in 2001 which has not been repaid but interest of £50,000 on the loan has accrued. HMRC have not raised any protective assessments and Frank has always been a higher rate tax payer. Frank has notified HMRC of his interest in settlement but is not obliged to reach a voluntary agreement with HMRC if it costs less to resolve matters via a current year charge.
Under the settlement opportunity Frank would be able to settle by offering voluntary restitution of PAYE and employers NICs at 2002 and 2002 rates with no interest payable – at lower historical tax rates. The Trustees could also waive the accrued interest without a tax charge.
If the trustees write off the loan in the current year, Frank would pay (via the company) PAYE and employees NICs at today’s higher tax rates with the company paying employers NICs. There would also be a tax charge on the waiving of the interest.
If Frank does nothing, then he will be subject to the loan charge in April 2019 – again at higher tax rates plus further IHT ramifications going forward. If the trust is wound up in the future, the loan charge will be offset against the tax arising then.
Frank is however looking to sell the company as he wishes to retire and would prefer not to indemnify the buyers against future EBT liabilities. He would rather wind up the trust in the next six months and have confidence that the matter is concluded.
For more information, please contact Lynne Pearson
or Jessica McLellan