EFRBS appears on the tax authorities’ radar

Monday, October 05, 2009 | Posted by: Sue Knight
Categories: Protecting your wealth | Tags: tax planning, HMRC, Sue Knight, Employer Financed Retirement Benefit Scheme, EFRBS, high earners

Last month, I outlined Employer-Financed Retirement Benefit Schemes (EFRBS) as part of 10 strategies for tax planning in 2009.

However, for other reasons, EFRBS have been catapulted into the ‘spotlight’ by HM Revenue & Customs (HMRC), which says it will ‘actively challenge examples of such arrangements as and when they arise’.

So, does this apply to all EFRBS and is this planning idea dead in the water for higher earners and companies?

UPDATE: Read our Budget 2011 update on EFRBS.

What is an EFRBS?
An EFRBS is a tax-efficient pension fund developed to offer UK residents pension benefits that allow maximum flexibility for the employee, as well as a tax-efficient structure for both employee and employer.

Why are EFBRS attractive to higher earners?
Alternative unapproved pension strategies, such as EFRBS, have become popular since the Government restricted tax relief for higher earners in the 2009 Budget.

Why is HMRC looking to challenge some EFRBS planning?
In the August 2009 Spotlights Article, HMRC comments specifically on an EFRBS arrangement that is structured to achieve an immediate corporation tax deduction before benefits have been paid by the scheme to the employee.

These arrangements are effectively creating a corporation tax deduction for the company without a corresponding income tax charge for the employee. HMRC states that: ‘We will actively challenge examples of such arrangements as and when they arise.’ This does not therefore apply to all EFRBS.

But don’t be put off as EFRBS still offer flexibility and tax efficiency.
The standard version of the EFRBS planning is a flexible unapproved pension scheme that is particularly suitable for UK resident employees who are:

• not domiciled in the UK;
• UK domiciled but likely to leave the UK by retirement; and
• UK domiciled, who intend to remain in the UK but have substantial remuneration to justify high levels of pension contributions.

What are the key features of EFBRS?
Firstly, the employer will establish the EFRBS with a trust provider, who can be onshore or offshore and the employer will then make contributions to individual employees, who each have a sub-fund.

The EFRBS must be established to provide retirement benefits for the employee, who can take pension benefits from age 55 onwards.

And the benefits?
In general, the structure has the following benefits:

• Employer contributions are not taxable as remuneration in the hands of the employee
• Employer contributions are not subject to UK National Insurance
• Any contributions made to the EFRBS obtain a deferred corporation tax deduction, which is triggered upon extraction of benefits (although as noted above there are planning strategies which purport to obtain an immediate corporation tax deduction)
• If the EFRBS is structured offshore, the fund can accumulate mainly tax-free (except for tax on UK source income)
• There is no requirement to purchase an annuity at the end of the life of the plan
• In the event of death there will be no inheritance tax liability on any assets in the EFRBS. Inheritance tax does arise however at each 10-yearly anniversary at a maximum rate of 6%

Tax planning opportunities and EFRBS
EFRBS do not fall within the rules applicable to registered pension plans and therefore the employer can fund in excess of the annual and lifetime limits using it as a way to incentivise staff and possibly as a profit extraction mechanism. With no maximum contribution limit and contributions not being liable to income tax, the employee can potentially make a very significant saving.

EFRBS contributions can also be used to invest in a wide range of asset classes including residential and commercial property, providing greater flexibility than approved pension arrangements.

The trustees of the EFRBS can advance funds to the employee by way of a loan at commercial rates. They can also make loans to the employer at competitive rates, free of the usual approved pension restrictions.

Conclusion
The standard version of the EFRBS is a flexible investment vehicle, which gives rise to some interesting tax planning opportunities. But it should primarily be seen as an additional pension pot, suitable for non-UK domiciled individuals, individuals likely to move abroad by retirement and high earners who find themselves restricted by the new rules relating to tax relief for approved pension schemes.

Companies putting in place EFRBS planning who are also seeking an immediate corporation tax deduction should take further tax advice following HMRC’s recent comments.

If you would like more information please contact us on .(JavaScript must be enabled to view this email address)

You might also find these links useful:

* Read more posts on EFRBS and Protecting Your Wealth.
* Last chance for EFRBS?
* How an HMRC letter about £3,000 of income turned into a £275,000 tax bill