HMRC have issued Spotlight 48: Disguised remuneration contractor loans settlements and obtaining a deed of release, to clarify how their settlement terms work for inheritance tax (IHT).

Ahead of the introduction of the loan charge on 5 April 2019, HMRC announced a new settlement opportunity  in late 2017 which remains open for users of Disguised remuneration and contractor loan schemes who wish to settle with HMRC.

It seems there is some confusion around the wording of the settlement agreement for contractor loan schemes, with taxpayers being told by advisers that HMRC will demand a deed of release or exclusion, or both in respect of their loans, before they will agree a settlement in respect of IHT. In some cases, say HMRC, advisers are charging clients for these deeds by way of either a fee or a percentage of the loan amount.

HMRC confirm in this spotlight that:

  • They will not demand a deed of release and/or exclusion before agreeing settlement for IHT.
  • Any fee paid for such a deed will not be deductible from the amounts in the settlement.
  • If no settlement is reached and the loan charge is payable, they may allow a deduction for any payment made to secure a deed of release or exclusion, so as to reduce the outstanding loan balance if it:
    • represents a genuine repayment of the loan
    • is paid in cash

For the avoidance of doubt, HMRC have changed the wording in their settlement pack in respect of IHT, and it now reads:

‘I wish to have IHT included in the settlement on the basis of the loans being written off or released within 30 days of a settlement being agreed. No further evidence will be required by HMRC of this. If the loans are not written off or released within 30 days of a settlement being agreed, I will contact HMRC so that the IHT position can be reviewed.’

As a result:

  • Taxpayers settling on contractor loans need to ensure that their loans are written off or released within 30 days or contact HMRC to see if the IHT amount included in their settlement needs to be revised.
  • The debt must be legally released; it is possible that the trustees may require this to be done by way of a deed, but this is not a stipulation of HMRC.

This highlights the need to pay attention to the IHT position when settling these types of schemes as well as considering, before the final settlement agreement is signed with HMRC, how to deal with the trust structure going forward and whether the loans can, and should, be written off accordingly.

Useful guides:

Disguised Remuneration
A guide to everything you need to know about disguised remuneration schemes, the loan charge, and how to settle with HMRC and avoid the loan charge.

Disguised remuneration final settlement opportunity
A detailed guide to the final settlement opportunity for all disguised remunerations schemes.

FAQs for disguised remuneration settlement
This guide looks at Frequently Asked Questions for settling Disguised Remuneration schemes. The FAQs relate to EBTs, EFRBS and contractor loan schemes (employed and self-employed).

External link:

Spotlight 48: Disguised remuneration: contractor loans settlements and obtaining a deed of release