The General Anti-Abuse Rule (GAAR) advisory panel has issued a new opinion on ‘Reducing an estate's value for inheritance tax via subscription for shares in a new company and gifting shares to an employee succession trust’.
The GAAR is structured by way of a ‘double-reasonable test’:
- It applies to arrangements which “cannot reasonably be regarded as a reasonable course of action”.
- Where it applies, Penalties of up to 60% of the counteracted tax can be levied.
The planning involved the setting up of a new company whereby a significant sum was used to subscribe for shares which were then gifted into a UK resident employee trust. In the specific case:
- The planning was undertaken a few months before death. The company used the funds to acquire investments.
- The purpose of the trust was stated as being to allow employees to share in the ownership of the company.
- The beneficiaries were employees, former employees and their descendants. Participators and those connected to them were excluded from benefit except for specifically permitted payments.
- The only company employees were the deceased, her son and his son's wife.
It was claimed that the transfer into trust was an exempt transfer for Inheritance Tax (IHT) under s.28 IHTA 1984 as:
- It was a transfer to a trust for the benefit of employees as set out by s.86 IHTA.
- The trust deed prevented company participators and those connected to them from benefitting from the settled property (the 'capital distribution restriction' in s.28).
- The trustees held more than 50% of the shares including voting rights after the transfer as also required by s.28.
If s.28 did not apply there would have been a chargeable lifetime transfer, taxable at 20% when the trust was set up and the value of the gifted shares would have remained in the deceased’s estate on her death shortly afterwards.
The panel, in finding that the arrangements failed the double reasonableness test, considered it was contrived and abnormal to transfer shares into a trust for the benefit of employees at a time when the business did not have or need employees and only the settlor's family could benefit. There was no evidence that the deceased wanted to use the trust to benefit non-family members.
It described the trust as being 'dressed up' and 'camouflaged' as a trust for the benefit of employees. It actually looked and operated like a family investment trust, making frequent references to 'money box companies'. It found that the motive for setting up the trust was not to benefit employees but to avoid IHT.
The panel went on to say that:
- Whilst s.28 does not prescribe that there must be a certain level of business activity or a minimum number of employees for it to apply, the arrangements may have been more legitimate had it been a long-standing family company with a long-standing workforce where the aim of gifting the shares into trust was to incentivise employees.
- It might be possible for s.28 to apply, even just before someone died, whereby the only/main trust beneficiaries were employee family members if the business was ongoing, active and had real substance, and its employees just happened to be family members.
Links to our guides
General Anti-Abuse Rule (GAAR) (subscriber version)
This briefing note looks at the key features of the General Anti-Abuse Rule (GAAR) contained within the Finance Act 2013, what areas of tax it covers and what you need to know about the provisions it contains when considering tax planning.
Finance Act 2016 introduces a penalty when a taxpayer submits a return, claim or document to HMRC which includes arrangements which are later found to come within the scope of the General Anti-Abuse Rules (GAAR).
IHT: Estate planning checklist
This checklist covers some of the essential planning points that taxpayers should know when planning for their estate and Inheritance Tax.