You know when someone asks a question and you think you know the answer but you cannot find the definitive anywhere…
Person owns 100% shares in Ltd Co ‘A’. Ltd Co ‘A’ owns 50% shares in Ltd Co ‘B’ - neither are trading co’s.
Ltd Co ‘B’ is likely to sold in next few years so ‘A’ would end up with cash so before then.
Can Ltd Co ‘A’ settle Ltd Co ‘B’ shares on trust? (I don’t think they can)
Or does Person have to settle Ltd Co ‘A’ shares personally?
Lucy Orrow CTA TEP
Lambert Chapman LLP
Corporate settlors are possible; thus, company A can settle its shareholding in company B.
The participators in A may be treated as settlors for CGT if the trust is non-UK resident and A is a close company. However, if the transfer is arm’s length in nature the the participators will not be treated as settlors.
[TCGA 1992 Sch 5 para 8; IHTA 1984 s94]
Malcolm Finney
Thank you Malcolm. It will most likely be a UK resident trust.
I’ve never come across a corporate settlor. Can you let me to some narrative about it please. Obviously we’ll need to engage legal advice, if it is possible. I guess the question is around completing the IHT forms as a company…
Lucy
Hi Lucy
I must confess that my knowledge is somewhat limited and basically stems from research I did some years ago. In my notes I don’t seem to attribute the sources from which i extracted information.
Certainly corporates can make (and indeed receive) gifts and thus qualify as settlors. However, I believe that for IHT purposes there is no section in
IHTA 1984 which deems participators in the donor company to be treated as the settlors. But settlement by a close company does give rise to a transfer of value by the participators [IHTA 1984 s94].
However, for CGT purposes participators of a close company (or non-res co which would be close if UK res) are deemed to be settlors re gifts made by the company [TCGA 1992 s 8(4)].
Issues become a bit more complex where non-UK domiciled participators are present and/or if the company is non-UK resident.
I haven’t had time to check HMRC Manuals which may offer some help and very few, if any, texts seem to deal with corporate settlors.
I haven’t had to complete any IHT forms re corporate settlors but presumably it is the participators of a close company who complete due to apportionment [s94]. S3A(6) precludes PET treatment. Non-close companies cannot make chargeable transfers [s2].
Hopefully, others may have had more experience than me.
Malcolm Finney
A non-close company cannot make a chargeable transfer: s2 IHTA 1984. A transfer of value by a close company can be treated as made by its participators: s94 and IHTM14851-6. There is nothing to prevent a company being a settlor (any “person” can be:s44) and a beneficiary but if it is close and has an IIP this is attributed to its participators.
There is nothing to prevent a company being a settlor for corporation tax on capital gains: s68A TCGA applies to “persons”. the gains of non-resident close companies may be attributed to participators who just need to be “persons” but only an individual participator can claim non-domicile: ss 3, 3A, 3D.
A company cannot be charged to income tax as a settlor: s627(4) ITTOIA and see TSEM4016.
The corporate settlor is an exotic beast and a good compass or experienced guide is a good idea. As Malcolm says companies can make and receive gifts but there is company law about the limitations. The lack of experience within HMRC is perhaps a recipe for their learning at your client’s expense (or yours if they object to the charges) and because corporate settlors have figured in tax avoidance schemes in the past may generate the wrong kind of aroma.
Jack Harper
I would normally be thinking about demerging the shares in Company B, and then settling those shares onto trust directly. If you wish a halfway house you could do a share split of company A, redesignating some (say E shares to avoid confusion) as being entitled to all profits, dividends and receipts of Company B and others (F shares) relating solely to Company A. Then you could give away the B shares into a trust?
It is probably only a theoretical point given the 100% ownership but it is not often that it will be in the best interests of a company for its directors to gift significant parts of its value away. I suppose that means that the costs will not be deductible against Company A’s income.
As always, seek specialist advice as this area can be a minefield requiring good quality corporate, tax and private client understandings.
Stuart Maggs
Howes Percival LLP