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Requirement To Correct (RTC): Inheritance Tax (IHT) and employment-related trusts

Requirement To Correct

The RTC rules may impose significant penalties on employment related-trusts which fail to correct by 30 September 2018.

Colin Ben-Nathan


KPMG in the UK


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What is the issue for employment-related trusts?

Finance (No2) Act 2017 introduced the new RTC regime. In practice, the legislation operates by imposing severe penalties of up to 200% on a Failure To Correct (FTC) offshore tax non-compliance before 30 September 2018. The minimum possible FTC penalty is 100%. 

The detailed mechanics of RTC are set out in our summary here. In essence, any offshore tax non-compliance which is not corrected on or before 30 September 2018 will be subject to the new FTC penalties. Importantly for employment-related trusts, ‘offshore tax non-compliance’ also includes IHT.

The RTC legislation applies in line with the normal time limits for the relevant tax.

For offshore IHT non-compliance, where an IHT account (i.e. a tax return for IHT) has been delivered and payment made and accepted in full satisfaction of the tax due, the time limits are:

  • 4 years from the date the tax became due in the case of a basic mistake;
  • 6 years from the date the tax became due in the case of a careless mistake;
  • 20 years from the date the tax became due in the case of a deliberate mistake.

However, if no IHT account is submitted, or there is an omission from a submitted account, the time limit is 20 years from the date that the IHT becomes due.

There is no time limit where the failure to submit or the omission is the result of deliberate behaviour.

Where trustees of an employment-related trust are unware that they have an IHT liability, an IHT account is unlikely to have been delivered. In these circumstances, the 20 year time limit will apply as a minimum.

When might IHT liabilities have arisen?

Some of the main risks that trustees of offshore employment-related trusts should consider are as follows:

  1. S86 IHTA: employment-related trusts which satisfy the conditions of s86 are generally relieved from IHT. However, s86 contains detailed requirements which can sometimes be overlooked when the trust deed is drafted. If this happens, both ten-yearly and exit IHT charges may have crystallised over the life of the trust and, if not corrected before the RTC deadline, may trigger FTC charges. This is an area which is subject to particular scrutiny by HMRC, as can be seen by the commentary in HMRC’s IHT manual.
  2. Revocable sub-trusts: HMRC remain of the opinion that an appointment to a revocable sub-trust can trigger an IHT charge. This view is not shared by all trustees or tax practitioners. However, if HMRC are correct it is likely that such IHT charges will have gone unreported over the years. Additionally, the sub-trusts themselves may have incurred ten-yearly and exit IHT charges over their life. Both would potentially be within the scope of RTC.
  3. Rangers Football Club 2012 PLC (in liquidation) (Rangers) v Advocate General for Scotland: As is well known, HMRC were successful before the Supreme Court in arguing that monies contributed to trusts for employees by Rangers were in fact a redirection of employees’ earnings and should have been taxed accordingly. What is less clear is whether, in these circumstances, HMRC considers the employer to be the settlor of the trust for IHT purposes or whether the Rangers decision has led them to conclude that the employees are in fact the settlors for these purposes. We are currently awaiting formal guidance from HMRC as to their view. Either way, this is likely to be a point of contention.
  4. Employee Benefit Trust (EBT) Settlements: While we are aware that some EBT settlements also covered the IHT position, we are also aware of settlements which did not. If the IHT position remains unaddressed under the settlement terms, urgent thought should be given as to what steps should be taken before the deadline passes.
  5. Warehousing shares: There are also potential issues for employment-related trusts which ‘warehouse’ shares and grant options. For example, HMRC have argued that in certain circumstances IHT charges arise on the grant of share options with an exercise price set at a discount to the market value of the underlying shares on the date of grant.

How KPMG can help

The window to correct offshore tax non-compliance closes on 30 September 2018. Non-compliance identified after that date will be subject to penalties of up to 200% (with a minimum penalty of 100%). Given the extended window of 20 years that can apply for IHT, now is the time for trustees to ensure that they are fully compliant.

An important point to note is that the legislation does provide some protection against FTC penalties in cases where there is a “reasonable excuse”. However, unlike the general rules, the RTC legislation does not allow reliance on professional advice to constitute a reasonable excuse unless it is given by someone who is not an “interested person”.

Broadly speaking, an interested person will be any advisor who was involved in the set-up of the trust. In practice, this means that if trustees wish to rely on a reasonable excuse defence, they may need to engage an independent advisor now to provide a second opinion. Alternatively, trustees could make a disclosure to HMRC before 30 September 2018 without accepting there is any unpaid liabilities; albeit this may trigger a subsequent enquiry. In such cases, HMRC say that “provided you give HMRC all the relevant information about the matter you will have made a correction under the RTC even if you do not agree that additional tax is due. As you have made a correction no FTC penalty can be due.”

KPMG can assist trustees of employment-related trusts to review their operations, confirm whether historical IHT liabilities have arisen and assist trustees with making a disclosure to HMRC (if one is required). And where KPMG was not the original advisor any advice should also provide a defence against FTC penalties.

If you have any queries, please do not hesitate to get in touch with your normal contact or e-mail

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