Loan charge warnings: new assessments & disproportionate IHT charges

HMRC are sending out further assessments to Income tax and National Insurance in respect of the Loan Charge to taxpayers with employment-related disguised remuneration loans. We also note that taxpayers looking to settle their cases are risking liability to significant and disproportionate IHT charges.

Discovery assessments

• The new assessments are being raised under the Discovery provisions and relate to amounts that, under the Disguised Remuneration Loan Charge rules, should have been declared and tax paid for 2018-19.
• In some cases. further charges are being levied under s.222 ITEPA 2003 on the basis that the tax due under the loan charge should have been paid by the employer under PAYE and, unless the employee ‘made good’ this tax to the employer, grossing up applies. Arguably this is correct if the employer has paid or does pay the loan charge, effectively the employee has had their tax paid for them and if they don’t reimburse this they have received a benefit. However, the s.222 charge can still apply where the employer does not meet its PAYE obligations and pay the loan charge and the employee ends up paying the charge themselves.
• In many cases, where a settlement has been reached, HMRC have used their collection and management powers to not apply s.222. This may make entering into settlement negotiations seem attractive however the benefit of no s.222 charge may be negated by potential Inheritance Tax (IHT) charges, especially as HMRC will not conclude a contract settlement here without covering off the IHT position.

Potential IHT charges

Employment-related schemes generally involved the use of an Offshore trust. Whilst certain Employee Benefit Trusts (EBTs) are exempt from IHT charges under s.86 IHTA 1984, others, notably Employment Financed Retirement Benefit Schemes (EFRBs) are not, and the Ten-year IHT charge can apply. Many such trusts have already passed or are approaching their ten-year anniversary dates.

• The liability for trust IHT charges rests with the trustees, the beneficiaries, and in some limited cases the settlor, under s.201 IHTA 1984.
• Where the trustees are offshore (and in these cases, they are often also professional corporate trustees) HMRC does therefore have the ability to assess the UK beneficiaries of the trust instead of the trustees.
• The ten-year tax charge rate is low, at a maximum of 6%, and a beneficiary whose loans seem insignificant in comparison to the total amounts taken by everyone who participated in their employer scheme might expect a low IHT charge, on the basis that it would be shared out amongst everyone proportionately according to their loan amounts.
• The sting comes in s.204(5) IHTA  which provides that a beneficiary can be liable for the charge up to the total amount of their benefit from the trust, which here means the total amount of the loans they have received from the trust. This means that on settlement the IHT due could be equal to the total loans taken, with Income Tax, national insurance and interest charges due on top.
• Depending on amounts and marginal tax rates, the total tax charge on settlement could therefore end up being 150% or more of the amount actually received from the scheme. This seems to particularly be the case where other scheme users settled before the ten-year anniversary date, or in some cases have failed to engage with HMRC about their scheme at all, leaving their shares of the ten-year charge to be split amongst those who are now looking to settle.

For many, this disproportionate IHT charge will make settlement financially impossible leaving them with little choice but to pay the loan charge if they have not already done so and leave their position open with HMRC.

What now?

Taxpayers receiving discovery assessments are urged to take professional advice, and quickly, as they have just 30 days in which to appeal the assessments and it is important, should their case go to the tribunal, that they clearly establish and set out the most appropriate and relevant Grounds of appeal.

It is still possible to have a discussion with HMRC about settlement and discover how much the potential IHT will be without committing to a settlement however these discussions can take anywhere from six months to a year. 

The Low Incomes Tax Reform Group (LITRG) has lots of useful information on this subject and may be able to assist anyone who is struggling to know what to do next.

Useful guides on this topic

Disguised remuneration loan charge
What is disguised remuneration? What is the loan charge? When does the loan charge apply? Will the loan charge affect me?

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Disguised remuneration 2020 settlement opportunity
What is HMRC's position on disguised remuneration loans where settlement was not reached by 30 September 2020? Can a settlement still be reached?

FAQs for Disguised Remuneration Settlements
Can I just repay my loans? What if I have paid the loan charge, can I still settle? How much will it cost to settle? And many other FAQs.

External links

CIOT: Loan charge and section 222 charges

CIOT: Low Incomes Tax Reform Group