‘Dextra’ will cost £100m

Small companies face paying a £100m inheritance tax charge on benefits paid
to employees ­when no one has died and there is no inheritance to collect.

The bill emerged as the consequences of the recent ‘Dextra’ case became
clear. The case ruled for HM Revenue & Customs in its view on employee
benefit trusts, commonly used in employee share schemes.

Stephen Woodhouse, tax partner at Deloitte, said that close companies,
defined as those with five or fewer shareholders, or those companies whose
shareholders are also all directors, would have to pay the charge on payments
made to family bene-fit trusts, a variant on employee benefit trusts, which have
been targeted by HMRC.
The IHT element is itself not new ­ such a charge exists for transfers of value
from companies to the trusts, and is paid by the shareholders.

But the charge is waived if the transfer is set off against corporation tax.
Lord Hoffman ruled in Dextra that where benefits provided by the trust
constituted only ‘potential emoluments,’ such as interest free loans, the
payments could not be set against corporation tax.

The IHT charge was introduced to prevent avoidance, as the government fretted
about family businesses distributing assets to younger generations through
trusts to avoid death duties.

Woodhouse said thousands of company trusts would be affected, the bill
running to over £100m. Sources said the Revenue has set up a unit to handle the

Many small businesses are unlikely to be aware of the charge, as the
complications of the Dextra decision have yet to become clear.

The case has encouraged HMRC to address other forms of EBT planning that it
regards as abusive, including those used to pay city bonuses.

Related reading