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Personal impact of loan charge legislation

25 August 2020
Issue: 4758 / Categories: Comment & Analysis
That ‘boxed in’ feeling
Key points
  • Practical and personal impact of the loan charge.
  • Was it likely that the government would introduce retrospective legislation?
  • Clients fear bankruptcy and relationship failure.
  • Conflicting advice from promoters and HMRC.
  • Slow progress and duplication of work.
  • Inheritance tax and potential double tax charge.
  • The threat of debt recovery proceedings.

Much has been written on the legislative effects of the loan charge legislation in F(No 2)A 2017. However, I am writing for several other reasons: first, to highlight my own personal experience as a tax adviser acting for several dozen contractors affected by the loan charge; second, on behalf of my firm which acts as accountants for these contractors; and, finally and most importantly, on behalf of my clients and their families who are personally affected by this.

Four years ago, emails with news of the forthcoming loan charge legislation started appearing in my inbox. In all honesty, at the very beginning, the overwhelmingly long and complex emails from the provider of the structure were often skimmed over quickly. It did not seem realistic that the UK government could possibly bring in retrospective legislation penalising individuals for using legitimate structures that had not yet been proven in a court of law to be illegal. Certainly, it did not appear to be something that would, in the very near future, consume my days (and often nights) with worry.

However, it quickly became reality, with clients relying on me for daily updates. Questions on losing the family home were first and foremost, followed by others on insolvency and bankruptcy. It was difficult to provide reassurance when, at the time, advisers themselves were not entirely sure of the possible outcome. Further, trying to provide clients with explanations of the government’s decision to put retrospective legislation in place was an impossible task on its own.

Discussions and repercussions 

Most initial discussions were financially centred to begin with, but matters intensified when the true impact of the loan charge hit home. The reality and enormity of having to pay a six-figure sum to HMRC was overwhelming to say the least.

Suddenly, I found myself thrown into a position of counsellor as well as tax adviser to several dozen men and women, many of whom could not – and still cannot – bring themselves to tell their partner of the tax implications for fear of losing them. Others were unable to have such a conversation for fear of being labelled a criminal and bringing shame on their family. How does someone even begin to explain the loan charge to a life partner who, in all likelihood, has been drip-fed opinions and preconceptions on tax avoidance from the media? How do they explain that, despite not having done anything illegal, HMRC would be penalising them?

Sadly, for two of my clients, such conversations led to their wives leaving them, one having been married for 40 years. The human loss of the loan charge was slowly becoming apparent.

As an adviser, I found myself the recipient of continual phone calls. Because many clients felt unable to tell anyone else of their impending tax liability, I became the only person they could speak to who understood the impact of the loan charge. I was fearful of the state of mind of some of these individuals; I never expected that my work in the tax profession would include personal counselling services and was conscious that my professional training had left me unprepared and ill-equipped to deal with such cases.

During this time, two of my clients confided in me that they had contemplated suicide; it appeared to be the only way out for them. Unfortunately, for seven men in the UK, there was no alternative. I still worry that this ‘statistic’ will not stop at this figure.

Understanding the options 

With the constant bombardment of correspondence from ourselves, HMRC and the scheme providers, my clients were struggling to understand their options, if any. The providers were adamant that settlement should not be considered. On the other hand, HMRC was advising that this was the only alternative to falling foul of the loan charge. The result was that clients were backed into a very dark corner. Admittedly, advice to our clients was difficult for fear of making the wrong decision; their futures lay in our making the correct choices.

The constant pressure revealed itself again when a client was helicoptered off an oil rig after suffering a heart attack. An otherwise fit man, he, his wife and doctor were under no illusion that this was stress-related, solely due to the ongoing pressure from HMRC.

On several occasions we pleaded with HMRC to make progress with our clients’ settlements. By this stage we had received initial proposals for most of our clients and had, in turn, submitted details of assets and liabilities as requested by the department. We submitted such information on our own template, which had been agreed formally with the Revenue’s counter avoidance team at the time.

Slow progress 

Months were going by with absolutely no correspondence from HMRC, other than standardised general mail shots which were often advising clients of their choices for settling, despite our having already submitted offers and details of income and expenditure. Similarly, we would receive letters from other departments requesting us, yet again, to fill out assets and liabilities forms. But as far as reaching a settlement was concerned, we were no further forward than we were two years before when the whole charade began.

Another year down the line and we had finally built up a strong relationship with one of the technical leads at HMRC and progress, albeit slow, was made slightly when we reached a point of agreed settlement for six of our clients.

Inheritance tax 

Further issues arose around the agreement of these aforementioned settlements. HMRC advised us that if the clients were to reach settlement and then ask the trustees to write the loans off, which most of them would for closure on the matter, an inheritance tax charge would be imposed on them.

Now, this is all fair and well and in line with the inheritance tax legislation when dealing with the write-off of loans; however, these were the same loans that HMRC has continually refused to accept as loans and have already been deemed to be earnings. These ‘loans’ have already been taxed as ‘earnings’ by the time settlement is reached. How can income that has already been deemed to be earnings and been taxed under the income tax regime suddenly become a loan and be taxed under the inheritance tax regime?

We have repeatedly asked this question of HMRC. While we often have reels of legislation thrown at us, we are not disputing the income tax rules surrounding earnings nor the inheritance tax rules on loans; we are simply asking for a reasonable answer to a reasonable question. In the UK we have a system that does not allow for double taxation such as this, but HMRC appears to be breaching its own rules. Double taxation has suddenly become double standards.

Loan recovery 

Just before Christmas 2019, we received news that the trustees had decided to assign the loans to a debt collection company. Since it is a trustee’s fiduciary duty to act in the best interests of the beneficiaries – in other words, the contractors – the legality of the loans being assigned was questionable, to say the least. It is my professional opinion that the trustees had breached their duty.

I repeatedly asked the trustees for a copy of the trust deed or the legislation that would allow them to assign the loans to a debt collector. To date, I have had no response.

Several times, the trustees said they were only assigning loans of beneficiaries who had not been in contact with them to advise whether they were planning to settle with HMRC. This was not the case. An elderly client, who was already in severe ill health, received a letter from the debt collector advising that he would have to repay loans of £800,000. This was on top of reaching a six-figure settlement with HMRC.

By this point, the pressure on clients is the most important factor and we were under pressure to find a solution while, it seemed, everyone was working against us. This was one of the lowest points of my career, to the point that I started to look for a new job, riddled with guilt that I would have to abandon clients with whom I had built up such a strong relationship.

Finally, we were able to work with the trustees and a solicitor in Jersey and have the loans written off before any were assigned. Naturally, the trustees charged a fee for this. It was near impossible to arrange these loan write-offs in the timescale given, but we managed to draft in a solicitor to ease the load at yet further cost to the clients.

As well as this, HMRC advised that it would not implement the additional tax charge that arose from writing off the loan before settlement.

Further, we were also able to conclude the six settlements with HMRC before the technical lead dealing with them retired. His leaving the department at this time was unfortunate because, not only had we built up a good working relationship with him, he appeared to be reasonable in reaching settlements.

Too little, too late 

This may seem like progress, but it was far from it. From a personal point of view, it was too little too late for our aforementioned elderly client who sadly passed away and spent the last three years of his life weighed down by the impact of the loan charge.

At the start of 2020, we were advised that each of our clients would be assigned an individual caseworker, although this has yet to happen for some. Unfortunately, those who have are now being asked, yet again, to complete assets and liabilities forms, despite this information having been supplied to HMRC more than a year ago. We are already under pressure due to the loan charge and dealing with other clients who have businesses affected by Covid 19; having to duplicate work due to HMRC’s inefficiency is causing extreme workload problems for us.

Deadlines and guidelines 

The UK government has now decided that all individual cases must be settled by 30 September 2020. The consequence is that we have gone from very little communication with HMRC to now being bombarded by caseworkers expecting us to jump through hoops to get the work off their desks before that deadline. There is not enough time between now and then for us to reasonably conclude all these settlements. But if we do not manage to meet this impossible deadline, the loan charge will be applied and we will have let down our clients.

HMRC has also appeared to change the guidelines to which it is working. Previously, we were able to negotiate a settlement and there was no threat on the marital home. Now, caseworkers are suggesting that homes be remortgaged to raise monies to pay the tax.

In previous settlements, HMRC was reasonable about not getting into long-term payment plans that would not be sustained. Now the department expects clients to commit to monthly payments of anything up to £3,000 until retirement or even past it in some cases. In what I hope is an exceptional case, one client received a letter with the option to pay the settlement in full now or make monthly payments of almost £6,000 for the foreseeable future. Such a financial commitment seems to be extraordinarily onerous and not one that I would usually recommend to a client.

Our clients are desperate to settle and have been for four years, particularly with further impending financial issues on the horizon due to the lockdown. The pressure is intensifying yet again on a much grander scale.

In a world where HMRC used common sense, priority would be given to reach settlement before client’s business and personal funds begin to dry up in the aftermath of Covid-19. However, after almost four years of persistent battling with HMRC, it is apparent common sense is not something at the forefront of the department’s mind.

The end 

Several months ago, I took the worst call in my professional career. A client had been diagnosed with terminal cancer. After telling his wife, I was one of the next to be called. This man was so concerned about passing this debt to his wife, who currently isn’t aware of the loan charge situation, on his death, he called his tax adviser before the news of his ill health had barely registered.

I had no advice for him, I couldn’t bring myself to tell him that the debt will pass to his bereaved wife on death, that despite grieving for her husband she will be burdened with a mammoth six-figure tax bill that she is unable to pay. A conversation that will keep until he has time to let the news sink in.

My client asked about the chances of reaching settlement with HMRC before his death. In light of the past four years of non-movement, I couldn’t answer this but I have specifically asked the officer to review this case.

This client’s health is a massive concern, the mental pressure and enormity of leaving this burden to his grieving wife will of course play a detrimental part in his health over the remainder of his life. During the time he has left, he will be plagued with the pressure of having to tell his wife about the loan charge.

At the time of writing, we are currently being pressured to have all cases settled within six weeks; unfortunately for one client who has been battling with HMRC for years, six weeks might be too late. 


Feedback - Employee benefit trusts

The (fairly straightforward) issue is that a loan write-off is (almost certainly) not a payment for IHTA 1984, s 72 (applying IHTA 1984, s 70(3)(b)) purposes, so will not avoid an inheritance tax exit charge.

As mentioned in my previous Taxation feedback comment, HMRC says in its Inheritance Tax Manual at IHTM42986 that there needs to be an income tax charge to benefit from the s 72 exemption, but that is plainly not the case.

As for IHTA 1984, s 65(5) (for relevant property trusts), here we are simply concerned with whether a payment falls to be treated (by virtue of a provision of the Taxes Acts) as income for the purposes of income tax. This would of course include an employee benefit trust payment which was (legislatively and/or contractually) relieved or exempt from income tax. In other words, it would still be such income and so potentially taxable, subject to any relief/exemption (which would not change the payment’s nature as such income in the first place – which is all that matters for the exemption to apply).

Clearly, HMRC wrongly disagrees with this correct analysis if there is no income tax due on such payment, but that needs to be resisted as discussed in my previous comment.

Above all, employee benefit trust loans should not be written off if at all possible, otherwise there is little if any scope to argue the absence of an inheritance tax exit charge.

Justin Bryant,

Blackfriars Tax.

Issue: 4758 / Categories: Comment & Analysis
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