Failed avoidance scheme gives rise to income tax charge only

The taxpayer’s company entered into a scheme intended to allow the taxpayer to receive a bonus from the company which avoided income tax and National Insurance. It involved the setting up of a trust of which the company was settlor and the taxpayer was the beneficiary.

After an enquiry HMRC ruled that the scheme did not work and the taxpayer accepted that tax and National Insurance were due. However HMRC also considered that the transfer of assets to the trust gave rise to an inheritance tax charge and issued a determination under IHTA 1984 s 94 (charge on participators in a close company). The taxpayer appealed.

The First-tier Tribunal noted that the effect of s 94 was that where a close company makes a transfer of value inheritance tax is charged as if that transfer were made by the participators in that close company. The...