Offshore employee benefit trust – I met a chap called Brian

Have you entered into an offshore employee benefit trust?

I met a chap called Brian, an expert in structuring property portfolios for the protection of family wealth and facilitating the passing of those assets in a protected environment for future generations free of inheritance tax. I almost peed myself with excitement over the fact that I could get the properties into a trust without tax charges and then the properties would be outside the scope of IHT. I was in heaven and Brian was my hero.

That moment of joy, that sunny Saturday walking in the park with my skin tingling with warmth and an inner feeling of contentment that I had successfully wrapped the properties up tax efficiently was short lived. On 18 May 2023 the Court of Appeal decided the outcome of Bhaur and others v Equity First Trustees (Nevis) Ltd and others. 

The claimants, a married couple, were members of a property partnership. No doubt an active partnership that constituted a business. The business was transferred to an offshore employee benefit trust (‘EBT’).

Warning: not all similar planning arrangements use an ‘EBT’. Well, the trust used is likely to constitute an EBT but the designer of the arrangements gives the trust a special name. This may be to simply blind the potential client into thinking the trust is different with magic-like qualities. Such trusts may be under the title of ‘Business Asset Trust’, ‘Employee Retention Trust’, ‘Commercial Purpose Trust’ or ‘I wave a magic wand and tax disappears trust’.

The planning intended to prevent IHT arising on the death of the married couple. HMRC challenged the arrangement and it was found to be ineffective. The claimants therefore applied to the High Court for the transfer to be set aside. The High Court denied the setting aside and found the couple knew they were implementing an avoidance scheme but did not predict the consequences. An appeal followed and found that the claimants must have been aware of the financial consequences of the scheme failing and that they may be worse than the IHT that would have otherwise applied.

The scheme was found to be ‘highly artificial’ having no independent business or commercial purpose and only existed ‘purely and simply for the purposes of tax avoidance’.  The judge commented that ‘artificial tax avoidance is a social evil that puts unfair burden on the shoulders of those who do not adopt such measures’. The judge may be being a bit harsh with the evilness although last week my article on the Pandora Papers commented:

‘Whilst the Pandora Paper’s headlines thirty five world leaders including current and former presidents, prime ministers and heads of state, I struggle to see Tony Blair being caught for tax avoidance or evasion (after all the High Court did not favour prosecution for the war based on non-existent weapons of mass destruction).’

Tempted as I am to have yet another rant on the destruction of moral willingness to be tax compliant when the governors of a country behave with selfish contempt following their own rules which differ from those they impose on the public, I move on to the real problem for users of these arrangements.

The users probably had no bloody idea what the risks were because the designer of the arrangements would not stand to benefit from the fee if they informed the users that the trust may constitute a relevant property trust (i.e. IHT on the way in, way out and every ten years) and that the value earmarked to a beneficiary may be subject to income tax. Doing the maths, a much worse position that IHT.

I also suspect the designer of the arrangements failed to set out the alternatives. The arrangement proposed is the best solution although maybe a family investment company or similar may have been more efficient.

HMRC is evidently aware of offshore trusts and, since 2016, receives information through the exchange of information with other tax authorities, who receive information from financial institutions (trustees etc.). Some arrangements are however different:

• They may involve declaration of trusts so property doesn’t change ownership (normally to keep low interest mortgages).
• The trust may be a ‘supplier trust’ or ‘remuneration trust’.
• The partnership business may have first incorporated and the company contributed assets or shares in the company contributed.
• Arrangements may involve an offshore company and a personal management company.

I am not sure if HMRC is aware of the various iterations of similar planning although now they receive information, it will only be a matter of time before arrangements are considered. HMRC does have resource issues so it may take a while for them to look at each one (and there are many).  Whilst HMRC may take some time to make enquiries, waiting and hoping they don’t enquire is probably not the best approach.

If you have implemented similar planning, have it reviewed by an independent specialist (like us). Since 2016, an automatic offshore criminal offence has existed applying where offshore income or gains are not included on a tax return. The offence does not need evidence to demonstrate an intent to evade taxes, it simply needs evidence to demonstrate an item was omitted from a person’s tax return. There is a reasonable excuse argument although unlikely to apply where the advice provided was also by the augmenter of the arrangements.

Brian lost the holy grail ☹.  

Offshore employee benefit trust

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