The tax treatment of a FURBS is punishing at every stage. Employer contributions were taxed as the employee’s income going in (before April 2006, and again from April 2011); the fund itself pays tax annually at discretionary trust rates on its income and gains; benefits are taxed again as employment income when paid out, with only partial credit for contributions already taxed; and the trust sits inside the inheritance tax relevant property regime, facing charges every ten years and on exits. Since 6 April 2006, any surviving FURBS has been treated automatically as an Employer Financed Retirement Benefit Scheme (EFRBS), and the modern rules live in Part 6 Chapter 2 of the Income Tax (Earnings and Pensions) Act 2003.
Why Your FURBS Is Now an EFRBS
On 6 April 2006, known as A-Day, the Finance Act 2004 rewrote UK pension taxation. Any FURBS that did not apply for registered pension status was reclassified as an EFRBS from that date. The statutory definition in Section 393A of ITEPA 2003 catches any employer-funded scheme that provides retirement benefits without being a registered pension scheme. The trust structure did not change; the tax code around it did, and generally for the worse.
Before A-Day, FURBS trustees were exempt from the special trust rates on investment income. That exemption was abolished on 6 April 2006, so from that day the fund became fully taxable at trust rates. If you are still holding a legacy FURBS, you are living under the EFRBS rules whether the paperwork calls it that or not.
Tax on Contributions Going In
Which tax you already paid on the money entering the trust depends entirely on when the employer paid it. There are three distinct windows, and the boundary between them matters when benefits are eventually drawn.
Before 6 April 2006
Employer contributions were taxed immediately on the employee as a benefit in kind under Section 595 of the Income and Corporation Taxes Act 1988. Income tax was due on the full contribution even though the cash went straight into a trust the employee could not touch until retirement. The employer also owed Class 1A National Insurance on the benefit.
6 April 2006 to 5 April 2011
For five years after A-Day there was no equivalent charge. Employer contributions flowing into the trust in this window were not taxed as employment income at the point of entry. This is the period that causes the most pain later, because there is no prior tax to credit against the eventual distribution charge.
From 6 April 2011
The Finance Act 2011 closed the gap with the Part 7A “disguised remuneration” rules. A charge to income tax arises when a sum or asset is held by or on behalf of a third-party EFRBS and earmarked for a member, even informally, with a view to a later payment. The employer picks up PAYE and NIC on the amount. In practical effect, post-2011 contributions are taxed on the employee up front, much like the pre-2006 position.
Tax Inside the Fund Each Year
A FURBS trust is not a tax-sheltered wrapper. Unlike a registered pension, where investment returns compound with no annual tax, the trustees must file returns and pay tax each year on everything the fund earns.
For 2025/26 and 2026/27, the discretionary trust rates that apply are:
- Non-dividend income such as interest and rent: 45%
- Dividend income: 39.35%
- Capital gains on disposals by trustees: 24%
The tax is paid out of trust assets before any distribution to members, so it erodes the fund directly. Over decades, the compounding drag against an equivalent registered pension (which would pay zero) is substantial.
Tax When Benefits Are Paid Out
Section 394 of ITEPA 2003 imposes an income tax charge on relevant benefits received from an EFRBS. It bites on lump sums, regular payments, and non-cash benefits. There is a narrow de minimis: if total benefits in a tax year are £100 or less, no charge arises, but once the £100 threshold is crossed the entire amount is charged, not just the excess.
Credit for Contributions Already Taxed
To prevent the same money being taxed twice, the distribution charge is reduced where prior employer contributions have already been taxed as employment income, and where the employee made personal contributions. Amounts already caught by Part 7A take priority and cannot be taxed again under Section 394.
The 2006 to 2011 window is where this hurts. Nothing was taxed going in, so there is no credit to set against the distribution. Every pound contributed in that period, plus its growth, faces full income tax at the member’s marginal rate on the way out. At the additional rate, that is 45% to HMRC.
Inheritance Tax on the Trust
This is where FURBS diverge most sharply from registered pensions. A registered pension is generally outside the estate for IHT, and discretionary death benefits usually pass free of the tax. A FURBS gets none of that.
HMRC treats the scheme as a discretionary trust under the Inheritance Tax Act 1984, placing it inside the relevant property regime. Three charges follow:
- Entry charge: when assets first enter the trust, a charge may arise if the transfer exceeds the available nil-rate band.
- Ten-year anniversary charge: every ten years, HMRC taxes the fund’s value above the nil-rate band at a maximum effective rate of 6%.
- Exit charge: when capital leaves the trust, IHT applies at up to 6% of the amount distributed.
The nil-rate band is frozen at £325,000 through at least 2027/28, so any fund value above that threshold is exposed. For a FURBS that has been running for decades, the ten-yearly charges alone materially reduce the fund.
Where trustees hold discretion over death benefits, the assets generally do not form part of the deceased member’s estate for probate. The trust bears any IHT itself. That distinction is real, but it does not remove the relevant property charges, and the spousal exemption that lets married couples and civil partners pass assets to each other free of IHT does not apply to distributions from a discretionary trust. Beneficiaries should expect a smaller net inheritance than a registered pension death benefit would deliver.
The Employer’s Deduction
One reason many of these schemes stopped receiving new money is that the employer’s corporation tax deduction is deferred. Contributions cannot be deducted when paid in. The deduction only becomes available in the accounting period when the employee actually receives a qualifying taxable benefit from the scheme. For a fund that will not pay out for decades, that is a long wait.
Contributions made on or after 1 April 2017 (corporation tax) or 6 April 2017 (income tax) face further restrictions that can prevent a deduction being available at all, even once qualifying benefits are eventually paid.
What Legacy FURBS Holders Should Do
Add the layers up and the position is stark. The fund pays trust rates on its income and gains every year. Distributions are taxed again as employment income, with credit only for contributions taxed on the way in. The trust faces IHT charges every ten years. For a scheme running since the 1990s, the cumulative tax take across these layers can consume well over half the total returns.
Winding up is one route some members consider. Where a pre-A-Day FURBS has no post-A-Day employer contributions, a lump sum on wind-up may qualify for more favorable treatment, but that depends on scheme rules and the member’s own tax position. Transferring the assets into a registered pension is generally not workable, because the contribution limits for registered schemes are far below the sums typically held in a FURBS. Most holders end up drawing benefits gradually to manage their marginal rate, while the fund continues to shrink under annual trust taxation.
The most valuable practical step is record-keeping. Keep clear, contemporaneous evidence of contributions made in each of the three tax periods (pre-2006, 2006 to 2011, and post-2011), any contributions the employee made personally, and the investment growth attributable to each layer. Without that split, calculating the correct reduction on distribution is close to impossible, and HMRC will default to taxing the full amount.
A Note for US Residents
If you are a US citizen or resident holding a FURBS, a separate American tax layer sits on top of everything above. A FURBS is not a qualified plan under US tax law, so it falls under Section 402(b) of the Internal Revenue Code: employer contributions are generally taxable to the employee under Section 83, and distributions are taxed under Section 72 as annuity payments, with part treated as basis recovery and the remainder as taxable income. The US-UK income tax treaty addresses pensions in Article 18, but the saving clause in Article 1 carves pension provisions out of the treaty’s protection against the US taxing its own residents, and whether Article 18 offers meaningful relief for a non-qualified arrangement like a FURBS depends on the facts. There are also annual reporting obligations that may include Form 3520, Form 3520-A, and the FBAR, with penalties that can reach the greater of $10,000 or 35% of the gross reportable amount on Form 3520 alone. This is cross-border territory where the cost of professional advice is small compared with the cost of getting it wrong.