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HMRC looks likely to step up moves to limit the attractions of EFRBS and EBTs as alternatives to pensions

Since writing my last article on the likely future of EFRBS and EBTs, we have had more lurid stories in the national press on the apparent widespread use by Premiership (and other) football clubs of EFRBS (and variations on the theme) to reward their key players. Further research is being carried out to establish whether lager, Chinese food and chicken nuggets can be held/distributed from EFRBS.

Seriously, though, revelation of such highprofile users and, inevitably, significant amounts of input into such schemes is a pretty potent mix likely to provoke or accelerate HM Revenue & Customs action. In basic format, the key or foundation attribute of employer-financed retirement benefit schemes is the ability for the employer company to move funds from corporate ownership to the ownership of a (usually) offshore EFRBS trust, to be held for the benefit of the employee without paying any tax or NIC.

As a corollary, the employer does not secure a deduction. The funds can usually be invested so that neither income nor capital gains arising within the EFRBS are subject to tax as they accrue. All tax considerations, assessment and deduction are deferred until benefits are withdrawn and, in some cases, “early” access to funds can be secured by way of a loan. This can also be IHT-attrac-tive, representing debt on the borrower’s estate if still outstanding on death. It should, however, prove difficult to legitimately avoid income tax on the removal of benefits, even if the employee/beneficiary is non-UK-resident when the benefits are received.

I referred to the known HMRC disquiet last week, with special mention given to the declared intention of HMRC to ensure that pay-ments in relation to EFRBS are less attractive than ordinary forms of remuneration.

As well as the lurid “Premiership teams use EFRBS” revelations, we have had the publication on November 10 of the HMRC pension schemes newsletter 42 which included the following: “In light of the announce-ment on the reduction of the annual allowance and the Government’s change of view on EFRBS, HMRC will look more closely at cases, where contributions stop being paid to registered pension schemes and are paid into an EFRBS instead, when considering whether or not anti-avoidance provisions relating to the annual allowance apply. The special annual allowance guidance will be updated as soon as possible to reflect this.”

In considering alternatives to pensions, those affected by the restriction of pension tax relief and their advisers could consider a relatively wide range of retail and non-retail opportunities.

The EFRBS/EBT option remains a current possibility but given the relative strength of negative HMRC sentiment against these plans, it could not be ruled out that the (seemingly inevitable) provisions to severely limit their attractions would not apply in some way to schemes effected in advance of the implementation of any such new provisions.

If last year is anything to go by, the attraction of the VCT is likely to continue as a tax-attractive supple-ment/alternative to regist-ered pensions. Of course, there is the small matter of the additional risk carried by such an investment – both to returns and liquidity – and this probably explains the strong interest in planned exit schemes.

This in turn, of course, could drive HMRC desire to make the conditions for qualification more focused on channelling investment away from such schemes but we do not have such legislation yet.

The main attractions are up to 30 per cent income tax relief on up to £200,000 of investment each tax year and tax-free dividends and tax-free capital gains on shares acquired within the annual subscription limit for income tax relief. Not much then. I will take a further (slightly deeper) look at VCTs as pen-sion alternatives next week.


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