HMRC loan charge write-offs penalises early settlers

• Taxpayers who settled with HMRC left at a disadvantage
• £365 million in tax to be written off over next five years

HMRC’s Budget announcement that £365 million of loan charge tax debts will be written off leaves taxpayers who settled early out of pocket, according to Price Bailey, the leading accountancy firm.

Price Bailey says that the usual position adopted by HMRC is that taxpayers who settle early get favourable terms, while those who do not come forward face tough enforcement. The offer announced at the Budget to those who have not settled turns that principle on its head.

According to Price Bailey, participants were typically paid through an offshore or onshore trust or remuneration vehicle that made sums available as loans (not salary) to employees or contractors. The loans were structured to be non‑repayable to avoid Income Tax and National Insurance, but HMRC’s disguised‑remuneration rules and subsequent case law treated those loans as employment income, which led to the loan‑charge regime requiring outstanding balances to be declared as income in specified years.

Where payments were routed through a trust, the sums can also be treated as benefits from a trust for capital‑tax purposes. Bona fide trusts face ten‑year periodic charges and exit charges to IHT. Trustees are primarily liable, but where trustees are offshore or cannot be assessed HMRC can look to UK beneficiaries to meet the charge. That means a beneficiary can face a separate IHT assessment in addition to income tax and NICs, and the statutory rules can produce a large IHT bill for an individual beneficiary.

What is being written off or reduced

• £5,000 automatic reduction: applied per individual who accepts the settlement
• Promoter‑fee offsets: documented promoter fees may be credited against liabilities
• No late payment interest: LPI is disapplied for new settlements
• IHT write‑offs: IHT arising from covered schemes will be written off for those who settle
• Cap: total reduction per person capped at £70,000
• Important caveat: there is no automatic, universal refund for people who already paid. Any relief for settled cases will require a separate process or representations

Andrew Park, Partner at Price Bailey, the chartered accountants, comments:

The findings of the Loan Charge Review are radical. HMRC’s decision not to pursue inheritance tax on offshore trust arrangements – in large part because of concerns over whether they were ever bona fide trusts – is unprecedented and raises questions about fairness.

For those people who have already settled with HMRC in full there is currently no clear pathway for parity or reconsideration for those earlier payments.

HMRC’s usual stance is that those who disclose early get better terms, while those who miss the window face tougher enforcement. This was the case with the Liechtenstein Disclosure Facility, which rewarded unprompted, early disclosure with capped penalties and prosecution protection, followed by tough enforcement against those who did not come forward. The loan charge adjustments deliver write‑offs and interest disapplication primarily to unsettled cases, leaving early settlers at a disadvantage. This is at odds with HMRC’s usual amnesty‑then‑enforcement model.

HMRC should set out a time‑limited process for previously settled taxpayers to seek equivalent relief so that early cooperation is not penalised.

He adds:

Many affected by the loan charge have endured years of anxiety, financial collapse and, in some tragic cases, devastating personal consequences. HMRC should prioritise humane, timely remedies and clear routes to redress for those who have already paid.

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