Regular gifts to a limited company

Trusts Discussion
1

I have a client (a couple) and would appreciate some views on the IHT treatment.

They transferred a property to their limited company in 2019 when they were shareholders/directors. Prior to this, they had also made cash gifts to their children. In 2021, they gifted all their shares in the company to the children but continued as directors.

Since then, they have regularly transferred personally owned properties to the company, and on one occasion transferred a property directly to the children.

My understanding is that transfers to the company are chargeable lifetime transfers, while direct gifts to the children are PETs. Given the mix of chargeable transfers and PETs, I believe relevant chargeable transfers and the cumulative transfer history as well 14 year rule will be applicable in this scenario.

Could anyone confirm whether this is correct or point out anything I may have missed?

2

In relation to the 2019 property transfer, it is the reduction in the value of each individual’s estate that is the transfer of value and this is offset by the increase in the value of the shares held. So if they own both own a £100,000 property, and the shares, 50:50 each then you might argue that there is no transfer of value, since each individual’s loss of their £50,000 property is offset by a £50,000 gain on their shares.

But that assumes (i) the property and shares are owned in the same proportion, and (ii) we gloss over some valuation issues (e.g. 50% of the shares in a company may not be worth half of the whole, and 50% of a £100,000 property may not be worth £50,000).

3

Thanks, Tigger for clarifying the initial transaction as I had some suspicion about this.

I also understand that the subsequent transfer of the shares to the children would generally be a PET.

My main concern is the subsequent regular transfers of properties to the limited company, at a time when they were no longer shareholders. Would these generally be treated as chargeable lifetime transfers and aggregated for IHT purposes, with the Nil Rate Band, applying to the cumulative transfers and any excess potentially subject to IHT at 20%?

If so, what steps can they take now to rectify the position, given that they appear not to have been aware of the IHT consequences of these transfers?

I would appreciate any views on this from other forum members as well.

4

I agree with Tigger that depending on the precise share rights there may be only a modest TOV arising from the company transfers and thus CLT by each transferor.

For example, if a single transferor transfers a single property to a company in which he or she owns all of the issued shares the TOV will be close to 0%. The problem of valuation arises where the shares are not valued on a net assets basis, the share rights do not link directly to asset backing , and of course the identity of multiple shareholders and their particular holdings especially if any are non-transferors.

There is also s.10 IHTA. If there is a TOV as a matter of valuation it may be disregarded. This provision is clear in its broad thrust but of course must be interpreted according to the rules of statutory construction—buying a ticket in the national judicial lottery.

It looks as if “no gratuitous intent” could be satisfied. A broad analogy is with the “element of bounty” test for income tax settlements: an individual who lends interest-free to a company in which he holds all the shares does not intend “bounty”. See IRC v Levy [1982] STC 442. We are not told the reasons behind the transfer but presumably they were strategic and not whimsical e.g. creditor protection or the distinctive IHT features of a family property investment company.

The snag with s.10, apart from the dearth of instructive case law, is that a transfer must also come within the counterfactual of either subsection (1)(a) or (b). Is a gift a “transaction” at all? IHTM offers no official clarification. I would hope the judicial mind could stretch to that: to exclude a transfer which was non-gratuitous because consideration was indirect, increase in share value, seems like casuistry and contextually perverse. Secondly, can a company be a “person”? Fortunately here HMRC accept that it can: IHTM04161, 04052.

The more obvious case, which cannot justifiably be distinguished as a matter of principle, is where a shareholder makes a capital contribution to a company. The analogy is not quite perfect with a cash subscription for a minority shareholding of lesser value on a P/E basis, where the transferor receives some consideration.

HMRC consider that an interest-free loan can be a gift for the GROB rules despite not being a TOV (14317) and despite there being no specific statutory or case law authority. A demand loan would not cause a TOV of course but a fixed term loan of this nature would and surely would have to come within s.10 in a Levy-type situation. Again IHTM is silent on such loans and s.10.

As a CLT would need to be reported the taxpayer/adviser has every right to seek clearance either informally or via the NSC procedure. Failure to report on time will not help the cause, one imagines.

The OP does not mention CGT but there is no hold-over relief under s.260 TCGA for a disposal to a company: (1)(b). See also HS295 para 5. Of course the properties transferred may be business assets within s165 and a company can be the transferee (but not of shares or securities: (3)(ba)) and they must be used in a trade profession or vocation: so not in a letting business (compare s.162 and CG65715).

There was no SDLT (compare transfers to a partnership) and that may have been one of the reasons or at least a benefit of a gift.

Jack Harper