What are Employer-Financed Retirement Benefits Schemes (EFRBS or EFURBS)? How do they work? What are the tax implications and consequences?
This is a freeview 'At a glance' guide to Employer-Financed Retirement Benefits Schemes (EFRBS or EFURBS). It provides a brief outline of EFRBS and discusses some of the tax avoidance elements.
At a glance
An Employer-Financed Retirement Benefits Scheme (EFRBS) or Employer-Financed Unapproved Retirement Benefits Scheme (EFURBS) is an unapproved pension scheme which means that it does not share quite the same tax advantages as a conventional occupational pension scheme.
- An offshore EFRBS may be a suitable retirement benefits wrapper for Non-domiciled employees or workers who are living and thinking of retirement abroad.
- Anti-avoidance legislation introduced in 2011 in Part 7A of ITEPA 2003 ensures that tax on employment income is not avoided or deferred through the use of trusts or other intermediaries, such as EFRBS.
- The 2019 loan charge applies to loans taken from EFRBS. See Disguised remuneration loan charge.
- Inheritance Tax (IHT) exit charges and Ten-year charges can apply to EFRBS.
What is an EFRBS?
There is an EFRBS where there is a scheme which involves:
- Payments in anticipation of, or on, retirement.
- Payments after retirement in connection with past service.
- Payments on death.
- Payments in connection with any change in the nature of the services of an employee.
A ‘scheme’ is broadly drafted and includes a deed, agreement, series of agreements or other arrangements. This can include formal arrangements such as a trust and also more informal arrangements such as decisions made in management meetings.
How does an EFRBS work?
A discretionary trust is established for the benefit of an employer company’s employees and their families. The employer company transfers funds into the trust. The scheme’s trustees apply the funds via a series of sub-trusts.
The EFRBS funds are set up to provide retirement benefits and UK-based pension schemes are subject to the usual investment restrictions.
Part 7A ITEPA 2003
In the past EFRBSs have been used to confer tax-exempt or low-tax benefits often by making loans to individuals. The rules in Part 7A ITEPA 2003 (See Disguised remuneration loan charge) ensure that there is an Income Tax charge as soon as the employer decides to allocate funds for a particular employee or their family, whether by earmarking or making provision for, what is in substance a reward or recognition or loan in connection with the employee’s employment, or making a payment or loan directly.
The tax charge is based on:
- The sum of money made available.
- The higher of the cost or market value where an asset is used to deliver the reward or recognition.
The amount concerned will count as payment of employment income and the employer will be required to account for PAYE and NICs accordingly.
The part 7A rules also affect the timing of the Corporation Tax deduction for the employer company. See Disguised Remuneration.
Registration of EFRBS
There is a requirement to register EFRBS with HMRC by 31 January following the tax year of their creation.
A contribution to, or a benefit from, an EFRBS triggers its creation.
If an EFRBS is also a trust there may be reporting requirements under the Trust Registration Service.
The loan charge
The loan charge applies to outstanding loans from disguised remuneration schemes on 5 April 2019 where a settlement with HMRC had not been reached by 30 September 2020. Many of the EFRBS structures used to provide loans to workers are likely to be affected by the loan charge. See Disguised remuneration loan charge.
The 2020 Disguised remuneration settlement opportunity remains available to users of EFRBS who can settle their position with HMRC by paying all taxes and NICs due, however, reaching a settlement no longer avoids the loan charge.
Why use an EFRBS?
- To increase pension savings if the UK lifetime limit or annual allowance is already exceeded.
- To provide a flexible offshore fund for employees who are non-domiciled in the UK, or intend to retire abroad.
- To shelter funds from Inheritance Tax (IHT).
- An EFRBS may have to pay a Ten-year IHT charge as the s86 IHTA exemption that can apply to some Employment Benefit Trusts (EBTs) will not apply here. Since each beneficiary could be liable for this up to the value of the loans received from the EFRBS (when used for disguised remuneration tax planning) this could be a significant cost in excess of the income tax and NIC's charges out together.
The hidden costs of Employee Benefit Trusts (EBTs) and EFRBS
The setup and ongoing costs ensure these tax planning vehicles are unlikely to be suitable for small companies. The ongoing cost of offshore trustees may be prohibitively expensive.
Other costs that a potential EFRBS user may pay include:
- An annual tax charge payable by the employee in respect of beneficial loan interest as loans are usually interest-free.
- An annual Class 1A Employer’s National Insurance liability.
- The trustees’ annual fees.
- Costs to wind the structure up if it ceases to be worthwhile.
The cost of an EFRBS needs to be carefully evaluated at the start and care taken to ensure future fees are considered.
HMRC's views on EFRBS and Employee Benefit Trusts (EBTs)
HMRC have long considered that EFRBS and EBTs are ineffective for avoiding PAYE and are tax avoidance schemes.
- HMRC have operated a policy of investigating tax returns where these schemes have been used and they seek full settlement of the tax due, plus interest and penalties where appropriate.
- New measures including Part 7A ITEPA and the loan charge make EFRBS less popular with tax planners.
- In many cases, HMRC take the view that there are Inheritance Tax implications in setting up and exiting the schemes and may transfer IHT ten-year charges to the beneficiaries where offshore trusts are involved. These can be significant and far outweigh any benefits received from the scheme.
Many EFRBS are based offshore and are governed by the law of that jurisdiction. The interaction with UK rules needs to be considered. Some of the advantages of a pension scheme will be lost if the rules are not met.
A UK-resident EFRBS is not subject to the same restrictions as a registered pension scheme and the annual and lifetime contribution limits do not apply.
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