Dicennial charge - close company settlor

A close company settled a trust (not a qualifying EBT under s.86 IHTA) with £500,000. The transfer of value is attributed to the three participators under s.94 but the values meant no IHT was payable.

On the ten year anniversary, would the trust benefit from a single nil rate band or is it treated as three settlements for IHT, each with its own nil rate band?

Logic (and hope) suggests the latter but I am far from certain.

Andrew Goodman
Osborne Clarke LLP

The company is the settlor for IHT. The IHT legislation although providing that gifts by a close company are treated as transfers of value by its participators does not then provide that these participators are settlors.

This may be contrasted with the CGT treatment for TCGA 1992 s 86 purposes where specific provision is made under which participators are treated as settlors [TCGA 1992 Sch 5 para 8].

Malcolm Finney

The question is, who is the settlor, for IHT purposes, and the answer is, for IHT purposes, the company. See my Taxation of Non-Residents & Foreign Domiciliaries (2020/21 ed) paras 98.41 (Co settlor: Shareholder settlors); 98.40.3 (Settlor of commercial trust: IT/CGT/IHT definitions), and if it were the case that the participators are indirect settlors, which may be doubtful, para 80.6 (Direct and indirect settlors).

Accordingly, the trust has a single nil rate band. Without entering the broad topic of whether IHT is logical, or to what extent it is logical, I would say that that result does not seem to me altogether illogical; though I can see it is not what the trustees would hope for.

James Kessler QC
Old Square Tax Chambers

Thanks both (my hard copy of James’ book is sitting on a shelf about 6 miles and 2 months away).

You may have seen from my duplicate post where I mentioned the oddity I’d found that was IHTM17085 (HMRC view that the scheme members of an EFRB are the settlors for IHT, even where the scheme is company funded). I didn’t mention the trust was an EFRB to avoid clogging the post but I’m now planning to rely on that to get two settlements/nil rate bands.

Andrew Goodman
Osborne Clarke LLP

HMRC may instruct Counsel to argue that their view is (a) not law and (b) wrong, as they did in Sippchoice. Peter Harris may know whether an EFRB fits in with a Socialist Harmonious Society as he seems to be keeping a weather eye on our own potential transformation. HMRC are already applying pragmatism as an override where jurisprudence is inconvenient.

Jack Harper

HMRC Press Release of 4 April 2011on EBTs doesn’t appear to identify explicitly who is/are the settlor(s). It states that “There is an immediate charge of 20% on the value transferred … in excess of the participators nil rate band”.

Malcolm Finney