Contractors loan settlement opportunity

The opportunity to disclose loan settlements has been extended to 30 June with HMRC stating that any settlement “should be agreed by 30 September 2015 at the latest."

Originally open until 9 January 2015, the opportunity to disclose has been extended to 30 June with HMRC stating that any settlement “should be agreed by 30 September 2015 at the latest”. They have also stated that “if you have taken advice and do not want to settle, please contact us. You do not have to wait until September 2015 before you can progress a case to First Tier Tribunal.” HMRC have made it clear that it holds the view that where payments made under a loan scheme make use of a discretionary trust or trusts then as well as being subject to income tax many schemes will also give rise to an IHT liability. They state that this “is a reflection of the more general position where taxed or untaxed income is settled into discretionary trusts which is then subject to ‘relevant property’ trust charges for IHT”

There are two main charges which apply:

  • The anniversary charge;
  • An exit charge may also arise when the trust makes a payment or transfers value to the contractor, or the trustees take an action which reduces the value of the trust fund.

The following is an example of a s86 Inheritance Tax Act 1984 (IHTA) Trust with sub trusts provided by HMRC:

  • Ali is a contractor who used a contractor loan scheme between April 2007 and March 2011. During that time he was contracted to provide strategic IT services for a UK company.  Monthly payments under the contract were paid through an offshore remuneration company then onwards to a trust which meets the conditions of s86. The Trust allocated £8,500 per month to a sub trust of which he was the sole beneficiary, and it loaned him the full £8500 immediately.  Over the period loans totalling £408,000 were made to Ali by the trustee.

    As the sub trust does not satisfy s86, IHTA , a s72, IHTA charge on property leaving a s86 trust may apply. However, the allocation to the sub fund occurred was made within three months of the trust receiving the payment and does not therefore trigger any s72 liability. For the charge to apply the payment must have been held by the s86 trust for at least three months before it leaves the s86 trust.

Ali wants to take advantage of the settlement opportunity and arranges through the remuneration company and trustee to provide him with written confirmation that the loans have been written off on 10 January 2015.

Broadly the IHT computation is based on the value lost by the trust and the length of time from April 2007 to March 2011 the loans have been held as relevant property and takes into account the nil rate band. The total IHT due is £2,801.25.

You can find out more contractors loan settlement opportunity via this link to the GOV.UK website.