Employee benefit trusts and inheritance tax considerations
Employee benefit trusts and inheritance tax considerations

The following Share Incentives practice note provides comprehensive and up to date legal information covering:

  • Employee benefit trusts and inheritance tax considerations
  • Overview of potential IHT charges
  • Inheritance tax issues for the trustees of an EBT
  • IHT charges on discretionary settlements
  • IHT charges on individuals
  • EBT as a discretionary trust
  • IHTA 1984, Section 86 qualifying criteria—the 'all or most' test
  • Falling outside a section 86 trust—sub-trusts
  • Falling outside a section 86 trust—fetter of discretion
  • IHT charges on EBTs which qualify as section 86 trusts
  • More...

Overview of potential IHT charges

It is important when establishing or operating an employee benefit trust (EBT) that the potential for Inheritance Tax (IHT) charges to arise is considered carefully. The following questions should be asked:

  1. Does the EBT meet the requirements of section 86 of the Inheritance Tax Act 1984 (IHTA 1984) (a section 86 trust)?

  2. Does the EBT have sub-trusts (and if so, is it still a section 86 trust)?

  3. Is the company funding the EBT a close company?

  4. How are the beneficiaries intended to receive benefits from the EBT?

Inheritance tax issues for the trustees of an EBT

As a general rule, property comprised in a discretionary settlement such as an EBT is subject to the IHT regime. Where an IHT charge arises, it is payable by the trustees of the settlement.

However, trusts which are for the benefit of employees which meet the specific requirements of IHTA 1984, s 86 ('Section 86 trusts') qualify for various exemptions from the IHT regime (such as the exit and ten-year charges explained below).

Employee-ownership trusts (EOTs), which are a special type of employee trust, similarly benefit from these IHT exemptions provided certain conditions are met (see below). For further general information on EOTs, see Practice Note: Employee-ownership trusts.

IHT charges on discretionary settlements

Unless a discretionary settlement qualifies as a section 86 trust (or benefits from another exemption), its trust

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