EBT and EFRBS Voluntary Settlements

Key Points

• Voluntary settlement should not be automatically ruled out
• Settlement terms can often be advantageous
• Advance Payment Notices mean cashflow benefit may cease in any event
• Each case is different and client objectives are paramount

We have been dealing with a number of voluntary settlements of EBT and EFRBS arrangements with HMRC for clients but a deterrent to settlement on the basis of PAYE & NIC can be the upfront costs involved.

However, we have compiled a list of 10 important features that should be considered before ruling out the idea of such a voluntary settlement.

1. Depending on the wording of the trust deed, the amount to be taxed may be treated as being inclusive of employers NIC. This can result in a saving of over 11% of the PAYE and NIC and a consequential saving in interest charges.
2. This means that if loans are written off or other assets distributed to the beneficiaries they receive more after tax than they would had they taken a bonus.
3. By settling, corporation tax relief for the original contributions and professional fees is secured and further relief for the additional costs of the PAYE & NIC being met now are given against the settlement sum rather than in the current year’s tax return.
4. Inheritance tax exit charges are levied on EBT sub-funds and personal EFRBS by HMRC if the trusts are wound up. However, as part of the settlement arrangements HMRC agree that the IHT charges can be met by the company rather than the trust, leaving more for the beneficiary.
5. If voluntary settlement of PAYE & NIC is made any previous income tax paid as benefits in kind on beneficial loans can reduce the amount of PAYE due or the individual who paid the tax can claim a refund of income tax paid.
6. Once settlement of PAYE & NIC has been made HMRC normally accepts there has been no element of bounty in the trust. This means that the proceeds of capital gains made by the trust can be paid to beneficiaries free of tax.
7. If a company pays income tax under PAYE on behalf of an individual and is not reimbursed, the payment of that tax is a benefit in kind. However, the company can pay the benefit in kind tax for the individual without further tax consequences.
8. Winding up of the trust brings to an end any exposure to IHT 10 year anniversary charges based on the value of trust assets, although the IHT advantage of any outstanding loans that would reduce the value of the beneficiary’s estate would also be lost; whether this is seen as a positive or negative aspect may depend on the age of the beneficiary.
9. If interest bearing loans have been made the tax leakage on the costs of servicing of the loans over an extended period may be disproportionately high.
10. Finally, if HMRC issue Payment Notices the original cash flow benefits may be lost or greatly diminished.

It is very clear from our work in this area that each case needs to be looked at separately in terms of the particular circumstances and the objectives of those involved. What makes sense in one case may be completely inappropriate in another.

If you would like to discuss whether voluntary settlement might be appropriate please contact a member of the team.