The General Anti-Abuse Rule (GAAR) advisory panel has issued, on 18 February 2025, a new opinion on ‘Reducing an estate's value for inheritance tax by acquiring shares in a company and gifting those shares to an employee trust’. A 2020 opinion by the panel was on a similar theme.
The planning involved three referrals meaning three separate opinions were produced by the GAAR but the facts and circumstances surrounding all three referrals were essentially the same.
- Prior to death, a significant sum of money was transferred into a company which had been set up by the now deceased.
- The directors of the company were family members of the deceased.
- The company allocated shares to the deceased in exchange for property and cash.
- The company set up an Employee Trust with an initial cash contribution of £100. The trust was to allow ‘employees from time to time to share in the ownership of the group’.
- The deceased gifted her company shares to the trust.
There were various technical arguments surrounding s.28 IHTA 1984 due to the transfer being an exempt transfer for Inheritance Tax (IHT) purposes, however, in these three cases the panel was not concerned with technical arguments and were satisfied the arrangements were within in the ambit of s28.
The panel clarified that referrals can still be made regardless of ongoing technical arguments between parties. The panel were satisfied the referral was valid and an opinion on the planning would be provided.
The trust deed outlined various relevant points:
- The trust was an irrevocable Discretionary Trust.
- Employees included directors.
- An exclusion clause provided certain categories of persons would be excluded from benefiting from the trust other than by means of ‘permitted payment’.
- Permitted payment is defined in the deed as a payment which would be taxed as income on the recipient.
A key provision of the trust was that persons owning 5% or more of issued share capital could not benefit from the trust, additionally persons connected were also unable to benefit from the trust unless by reason of death the persons were no longer connected. This provision therefore allows for the connected family members to benefit from the trust once the deceased had passed away.
HMRC believed that:
- The arrangements were for no other purpose than to obtain an exemption from IHT.
Specific points being:
- The company has no employees, and the directors are all members of the deceased’s family.
- Since death, no other employees or directors have been added.
- No significant business activity has been undertaken.
- There was no obvious commercial reason for the deceased to give such a large number of shares to the trust.
Representations were made that argue:
- The deceased made use of a relief ‘freely offered by Parliament’, the executors of the estate accept the main purpose of the transaction was to obtain relief under s28.
- HMRC delays in pursuing the case have caused the business to stall in its development.
- HMRC have no policy to determine when taxes ‘can be gathered or relief should be available’, they should apply what Parliament has enacted.
It was accepted by all parties that arrangements were put in place purely to obtain a tax advantage.
The panel outlined:
- Overall the purpose of s28 is to provide an exemption from IHT for transfers of shares into an employee trust.
- However, the principles behind s28 (found in Hansard) outline specifically that distributions cannot be made to shareholders of the company and connected persons.
- The purpose of these principles being to avoid an employee trust being used as a ‘tax free money box’ and to prevent family wealth building up within a trust environment then paid to family members and not employees.
The panel went on to say that the setting up of a company and setting up a trust for employees of that company can be seen as reasonable steps taking to obtain a tax relief. In isolation these steps are acceptable.
Taking together with the fact that the trust had no beneficiaries outside of the family, the company had no employees beyond the family and the company had no business activity other than a small rental income from the property, means the steps appear to be contrived to avoid the restrictions in s28.
Worth noting: the GAAR panel issued an opinion on a similar theme back in 2020, see GAAR Opinion: IHT gift of shares to employee succession trust.
Useful guides on this topic
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.
Penalties: GAAR
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.
External link
GAAR opinion: Reducing an estate's value for inheritance tax by acquiring shares in a company and gifting those shares to an employee trust.
