IHT not due on failed EBT arrangement

In Tonkin v HMRC [2025] UKFTT 750 (TC), the First-tier Tribunal (FTT) allowed the taxpayer's appeal against a charge to inheritance tax (IHT) under section 94 (charge on participators in a close company), Inheritance Act 1984 (IHTA 1984), which HMRC considered had arisen as a result of an ineffective employee benefit trust (EBT) arrangement.

Background

Ms Annette Tonkin was the sole director of, and shareholder in, Resource (Marketing Research) Ltd (RMS), a market research company. In 2012, Ms Tonkin was advised to enter into a tax avoidance arrangement that was intended to enable her to receive a bonus free from income tax and national insurance contributions (NICs).

At a high level, the arrangement involved the following steps:

1. A Guernsey-resident trust was set up, with RMS as settlor and its employees as beneficiaries.
2. RMS made an initial contribution to the trust of £100.
3. RMS then borrowed £740,000 from a separate company called Havelet Finance Ltd (HFL).
4. RMS transferred the £740,000, and the trust transferred the £100, to a separate company called International Employment Services Ltd (IES).
5. IES used the money it received to buy gold which it held as nominee for Ms Tonkin.
6. IES immediately sold the gold and transferred the £740,000 to HFL and the £100 to Ms Tonkin.
7. Ms Tonkin promised to pay £740,100 to the trust within 10 years.

The purported result of this arrangement was that Ms Tonkin had repaid RMS's debt to HFL and, as such, RMS now owed Ms Tonkin £740,000. This amount was credited to her director's loan account, and she was able to draw down from it free from income tax and NICs. 

HMRC opened an enquiry into RMS's tax return and subsequently issued closure notices on the basis that the arrangement should properly be construed as the payment of earnings to Ms Tonkin in the form of gold (i.e. money's worth), such that income tax and NICs were due.

HMRC also determined that the arrangement created an IHT liability under section 94, IHTA 1984.

The effect of section 94 is that where a close company makes a transfer of value, IHT is charged as if that transfer of value was made by the participators in the close company. For these purposes, the value transferred is apportioned between the participators according to their respective rights and interests in the company. As a result of section 3A(6), IHTA 1984, this deemed transfer of value is not a potentially exempt transfer and gives rise to an immediate charge to IHT.

Ms Tonkin accepted the income tax and NICs liability but appealed the IHT determination. 

FTT's decision

The appeal was allowed.

The FTT considered two issues:

1. Whether the transfer of value was "attributable to a payment or transfer of assets to any person which falls to be taken into account in computing that person’s profits or gains or losses for the purposes of income tax or corporation tax” (section 94(2)(a), IHTA 1984). If it was, then the transfer of value would not be apportioned to Ms Tonkin.
2. Whether the recipient of the transfer of value was Ms Tonkin (as she contended) or the trust (as HMRC contended).

On the first issue, the FTT held that the term "profits or gains" should include a payment of employment income. By virtue of the transfer being deemed employment income, for the purpose of the income tax charge, it should not also give rise to an IHT charge.

With regard to the second issue, the FTT again agreed with Ms Tonkin and highlighted the inconsistency in HMRC's position, which appeared to view the transfer as a payment of earnings to an employee for income tax purposes, but as a transfer to the trust for IHT purposes.

Comment

This is a significant victory for the taxpayer. The decision considers fundamental issues of double taxation and the ability of HMRC to take different approaches in the context of different taxes. The decision is likely to be welcomed by the large number of taxpayers who implemented EBT arrangements and in respect of which HMRC wish to impose an IHT liability. 

The decision can be viewed here.