An EFRBS (or EFURB) is a unapproved pension scheme which means that it does not share quite the same tax advantages of 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.

This note provides a brief outline of EFRBS and discusses some of the tax avoidance elements. 

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. See Disguised remuneration.

How do 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 EFRBS 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 (making provision for) what is in substance a reward or recognition or loan in connection with the employee’s employment, or making a pament or loan directly.

The tax charge is based on:

  • the sum of money made available; or
  • 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 a payment of employment income and the employer will be required to account for PAYE accordingly.

The part 7A rules also affect the timing of the corporation tax deduction for the employer company. See Disguised Remuneration.

The loan charge

The loan charge applies to outstanding loans from disguised remuneration schemes on 5 April 2019 where a settlement with HMRC has not been reached or was not in process at that date. Many of the EFRBS structures used to provide loans to workers are likely to be affected by the loan charge. See Disguised remuneration.

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 will however pay a ten year IHT charge.

The hidden costs of EBTs and EFRBS

The set up and on-going costs ensure these tax planning vehicles are unlikely to be suitable for small companies. The ongoing cost of trustees may be prohibitively expensive.

Other costs that a potential EFRBS user may pay include:

  • An annual tax charge is payable by the employee in respect of beneficial loan interest.
  • An annual Class 1A Employer’s National Insurance liability.
  • The trustees’ annual fees.
  • Costs to wind the structure up if ceases to be worthwhile.

The cost of an EFRBS need to be carefully evaluated at the start and care taken to ensure future fees are considered. 

HMRC's views on EFRBS and EBTS

HMRC has long considered EFRBS (and EBTs or employee benefit trusts) 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 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 of setting up the schemes.

EFRBS rules

Many EFRBS are based offshore and are governed by the law of that jurisdiction. The interacttion with UK rules needs to be considered. Some of the advantages of a pension scheme will be lost if it 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.

Need assistance in this area?

Please find contact details on our Virtual Tax Partner support. See also our Disguised Remuneration zone.

 

 

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