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 ÂŁ100,000 property may not be worth ÂŁ50,000).

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

5

With respect, I think the analysis may have overlooked an important part of the facts. According to the OP, all the shares were gifted to the children in 2021. The parents therefore had no continuing shareholding when the subsequent properties were transferred to the company.

Subject to whether full consideration was provided—for example, by crediting a loan account at market value—each subsequent property transfer would appear to diminish the transferor’s estate without any compensating increase in the value of property in their estate. It would therefore appear to be a transfer of value and, because the recipient company is not an individual, a chargeable lifetime transfer rather than a PET. The 2021 gift of the shares, and the property transferred directly to the children, would ordinarily be PETs.

There would also appear to be an immediate CGT issue. Hold-over relief under TCGA 1992 s165 would not normally be available for ordinary investment properties because property letting is not generally a trade, profession or vocation, save for activities such as hotels or similar trading operations. Section 162 is potentially wider and can apply to a sufficiently substantial property-letting business, but it requires the transfer of the business as a going concern with all its assets, other than cash, in exchange wholly or partly for shares. Repeated transfers of individual properties after the shares had already been given away would not appear to qualify.

Finally, I do not agree that there was necessarily no SDLT. The parents are likely to remain connected with the company through their children, assuming the children control it. FA 2003 s53 would therefore generally impose SDLT by reference to market value even where the properties were gifted for no consideration.

Depending on the circumstances, the successive transfers might also be linked transactions under s108 if they formed part of a single scheme, arrangement or series. If so, the market-value consideration would be aggregated for the purpose of determining the applicable SDLT rates, although common parties and a succession of transfers would not, without more, necessarily establish linkage.

6

With respect, I think the analysis may have overlooked an important part of the facts. …

No respect needed here. I was just commenting on the narrow 2019 transfer point on the basis that I agree with the OP’s comments about the transfers to the kids being PETs and to the company being CLTs (albeit I thought the the 2019 one might be for nil / small amount). If I had replied about CGT, I would have said that I thought each was a deemed market value disposal - which does not seem controversial. And I have only just learnt to spell SDLT and so would not have commented on that.

In relation to Jack’s is-a-gift-a-transaction point, I’ve not thought about this before but would assume that this was intended to be a capital contribution to the company that increases the value of the shares and so was a transaction for IHT purposes. But what do I know? I do know that the Companies Act would treat this as a transaction if the company was making the transfer but I know that is far from being relevant for IHT. If valuation was an issue, my concern with s10 applying is the inclusive definition of a transaction (that includes a series of transactions) and whether the property transfer was part of a plan to benefit the kids. But we have no idea of the facts or valuations as to whether this is in point or not.

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7

Apologies and thanks to Anthony for pointing out my errors, mea maxima culpa.

1. Timing of transactions

I missed the sequence. Because it felt instinctively that the property transfers would have come first I totally missed that they followed the share gift. If the children owned all the shares in the company at the time then s10 IHTA had no operation and the property transfers were indeed CLTs.

2 SDLT
I completely overlooked s.53 in my analysis based on the wrong timing. On the actual timing the position is convoluted but seems clear enough.

Under s.1122 CTA2010 subsection (3) the transferor (treating spouses as one since connected) called “A” must either control the company or do so together with connected parties.

The snag is that s.1123(1) applies the definition of “control” in as.450-1 which determine whether a company is close. These provisions attribute the rights of children, as “associates”, to parents. So the parents control the company even if they own no shares in it and even if another person or persons also control it.

That is weird overkill enough you might think but even in the absence of those attribution rules, there are more vague quasi-metaphysical connecting tentacles. First, s1122(4) which connects any two persons “acting together”. Secondly, the attribution rules in s.450(3) and thus in s.451(4) are not exhaustive but only “in particular”. S.450(2) catches control exercised “indirectly”, whatever that means. However, although s.439(2)(b) can make a company close if controlled by “participators” who are “directors” this type of control is not imported into s1122. Both terms are widely defined in ss452 and 454. I am not sure if that is a consolation! The clear objective is to make s.53 FA2003 operative in a wide variety of situations where the “vendor” has a statutory connection with the “purchaser” company that in fact no one sane would regard as constituting control in its dictionary meaning.

Ss75A-C are formidable anti-avoidance provisions, even without the GAAR. I tentatively suggest that they might not apply.
First, where there is a single land transaction is it permissible for HMRC to go hunting for some other transaction in order to concoct a different notional transaction? Secondly, the provisions are not a licence for HMRC to willy nilly disregard real world events. I doubt they could link a gift of shares in 2019 to a land transfer in 2021 to argue for a notional transaction which assumed that the donor still controlled the transferee if that was blatantly not so. Even if the 2021 transfer was in contemplation in 2019. For example, if the shares had been sold to an unconnected person in 2019 and retained at 2021 HMRC surely cannot argue the donor retains the shares. One hopes it is only in Russia that “Nothing is real and everything is possible”.

Jack Harper

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