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Replies to Queries - 3 - Company's generosity

16 October 2002
Issue: 3879 / Categories:

Has anyone come across a computation of the lifetime inheritance tax liability that would arise following a transfer of value by a close company?

My client, who owns 100 per cent of the shares in a United Kingdom company was previously advised that his company could 'gift' its shares in a property holding subsidiary to a trust set up for the benefit of the shareholder's children.

Section 94 of the Inheritance Tax Act 1984, provides that:

Has anyone come across a computation of the lifetime inheritance tax liability that would arise following a transfer of value by a close company?

My client, who owns 100 per cent of the shares in a United Kingdom company was previously advised that his company could 'gift' its shares in a property holding subsidiary to a trust set up for the benefit of the shareholder's children.

Section 94 of the Inheritance Tax Act 1984, provides that:

'... where a close company makes a transfer of value, tax shall be charged as if each individual to whom an amount is apportioned ... had made a transfer of value of such amount as after deduction of tax (if any) would be equal to the amount so apportioned ...'.

I wonder if the nil rate band is available against such transfer. The Inland Revenue seems to take the view that the nil rate band is only available to individuals and, since the transfer is actually made by the company, no nil rate band can be set against the amount apportioned to the participator. I would have thought that the requirement for the transfer by the company to be treated 'as if it was made' by the shareholder would mean precisely that it should be treated like any other chargeable lifetime transfer. Also Chapter I6.128 (Cumulation) of Simons Direct Tax Service states that 'the gross amount chargeable is cumulated with other transfers in the usual way'.

I would greatly appreciate comments on the above.

(Query T16,094) - Not gifted.

 

Where a company makes a gift to, or at the instance of, a participator the value is apportioned amongst all shareholders (apart from any owning less than 5 per cent) and treated as an immediately chargeable gift, see the Revenue's CTO Advanced Instruction Manual, at paragraph C.120. In this case, there is only one shareholder so apportionment would not apply. Under section 94(1), Inheritance Tax Act 1984, the amount of any deemed gift is grossed up, but adjustment is made for any corresponding increase in a recipient's estate. Otherwise if you received the gift and were, in turn taxed on it, then in effect there might be a double charge. Here the effect of the gift is to create a trust for beneficiaries so there is no corresponding gain to the shareholder.

What is also clear (see section 3A(6), Inheritance Tax Act 1984) is that an apportioned 'gift' cannot be a potentially exempt transfer; however the annual exemption will be available as well as any balance of the nil rate band. Thus if 'Not gifted's' client has the full £250,000 available as well as the annual exemption, then tax is only charged on the excess above £253,000. Tax is charged because it is the company that has made the gift, which is subsequently deemed to have been made by a participator. With a potentially exempt transfer there is always the possibility that a charge to tax will arise because the donor may die, but a company can continue forever. 'Not gifted' should contrast the position with that of a discretionary trust which might also continue forever, but where ten-year charges ensure some contribution to the public purse.

The reference in chapter I6.128, Simons Direct Tax Service means that the apportioned amount uses up part of the nil rate band, discussed above, but this does not make it a potentially exempt transfer. The amount will eventually drop off the cumulative total, but only after seven years. Thus the amount apportioned will always affect the tax payable on the death of a participator within seven years of the deemed transfer.

Finally, liability for the tax rests primarily with the company although there are provisions (section 202, Inheritance Tax Act 1984) to allow recovery from the deemed recipients (again exempting those owning less than 5 per cent). Unfortunately the effective tax charge is 25 per cent of the deemed transfer after grossing up at the lifetime rate of 20 per cent; but, in my experience, such transfers are usually made as an alternative to immediately chargeable transfers so that the tax differential may only be an issue of timing. If an individual to whom apportionment is made dies within seven years of the transfer no extra tax is chargeable. This is because there is no provision for charging death rates on the death of an individual to whom a gift has been apportioned because section 7(4), Inheritance Tax Act 1984 only refers to 'the death of the transferor'. - Flipper.

 

While the 'as if' distinction in section 94(1), Inheritance Tax Act 1984 does sometimes import a distinction between gifts made by a company and attributed to a participator and those made (directly) 'by' him, it is extremely difficult to see how there not only should, but could, be any distinction as far as the rate of tax is concerned. The nil rate band is definitely a rate and not an exemption. This is made quite clear, first, by the terms of Schedule 1 to the Inheritance Tax Act 1984, and, in the context of this particular provision, also by the fact that, originally, capital transfer tax was a multi-banded tax. In such circumstances, the grossing up provided for in section 94(1) and (5) just could not have applied on the basis of the misapprehension under which the official in question appears to be operating.

It is therefore suggested that a reference should be made to the Assistant Controller (Litigation) with a view to having this sorted out. I have not met this interpretation being advanced previously.

The official in charge of the case may have been confused by the provisions of section 3A(6), Inheritance Tax Act 1984, which prevents this type of transfer qualifying as a potentially exempt transfer. But the very need for such a provision in that respect, and there is no equivalent in, for instance, section 19, Inheritance Tax Act 1984 (annual exemptions), which, in common with section 3A(1), refers to transfers 'by' an individual, suggests that the point must be a bad one where specific provision has not been made. - JdeS.

 

Issue: 3879 / Categories:
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