Disguised remuneration: EBTs and the new “outstanding loan” charge applying in April 2019 – what if the individual dies in the meantime?

The standard of legislative drafting in the UK is very high and particularly so in the case of tax legislation. It was therefore a surprise (and, I am afraid to admit, a matter of some satisfaction) to have discovered an error in the highly complex ‘disguised remuneration’ rules first enacted in 2010, and since amended on many occasions, most recently in the F(No.2)A 2017 to take account of the forthcoming “outstanding loans” charge in April 2019, and which the Parliamentary draftsman has accepted will need to be corrected in a future Finance Act.

The subsection in question is s554A(4) ITEPA 2003. As most recently amended, this is intended to provide that the 2019 “outstanding loan” charge will not apply if the individual who has received the loan from an EBT (or other relevant third party) has then died. It appears that the draftsman (perhaps understandably) overlooked the fact that the sub-section had already been amended by the first Finance Act of 2017. As a result, the words: “…or a relevant step within para 1 of Sched 11 to F(No.2)A 2017 which is treated as being taken…”[i.e. the 2019 outstanding loan charge] have ended up in the wrong place. As it stands, s554A(4) can be of no effect, as neither of the conditions in sub-paras (a) or (b) [i.e. that the relevant step is within s554B or 554C] will ever be satisfied in the case of such an ‘outstanding loan charge’.

To give effect to the presumed intention, s554(4) should read :

Chapter 4 does not apply by reason of a relevant step taken on or after A’s death if:

(a)  the relevant step is within s554B, or

(b)  the relevant step is within s554C by virtue of subsection (1)(ab) of that section, or

(c)   it is a relevant step within para 1 of Sched 11 to F(No.2) A 2017.”

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