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Offshore EBT schemes facing anti-tax avoidance shake-up

Mercator Trust’s Stephen Collier discusses changes to offshore EBT planning

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An EBT and its close relation, the Employer Funded Unapproved Retirement Benefit Scheme (“EFURBS”), are typically set up offshore and have become increasingly popular following the restriction of tax allowances for pension contributions, and the increase in the top rate of Income Tax to 50%.

In brief terms, where a sum is paid by an employer into an EBT or EFURBS which have been structured as an offshore pension, no PAYE is due by the employer or employee which means that 100% of the sum may be invested and over the longer term, this can be extremely beneficial due to the enhanced investment returns achieved. 

The individual will only be taxed on the sums drawn from the EBT or EFURBS on retirement which provides a very effective tax deferral.

The tax deferral does however come at a cost, and the employer does not obtain a corporation tax deduction for the monies paid into the EBT or EFURBS until the individual is taxed on the sums drawn, which could be many years later.

Although this is in itself a very tax effective vehicle, in some situations structures have been devised which attempt to accelerate the corporation tax deduction so that this is given immediately even if the individual has not been taxed on a drawing from the EBT or EFURBS.

Aggressive schemes

Other situations make it clear that the funds are specifically for the benefit of the individual and allow for these funds to be paid away to them almost at will. It would appear it is these more aggressive situations that HMRC will be seeking to stop and this may become clearer once further details are available of the anti-avoidance provisions.

It is thought that the more standard EBT and EFURBS arrangements which do not attempt to accelerate the corporation tax deduction or provide undue benefits to the individual will not be the main focus of attention for HMRC.  However, Mercator would recommend specialist advice be sought. 

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