Settlement of company shares

I have been asked to set up a trust in a case where some corporate restructuring has been taking place, ending with a situation where Mr X owns the shares of Co.A while Co.A owns the shares of Co.B. The shares of Co.B are to be settled in trust.

Who will be the settlor? a) Co.B to settle its own shares (assuming articles allow that); b) Co.A to settle the shares in Co.B which it owns; or c) Mr X to settle the shares in Co.B which he owns through his ownership of Co.A?

Which one or more of those options are possible in this scenario where the shares of Co.B are to be settled?

Remi Aiyela

I imagine option (b) is the practical steps. Mr X would make a chargeable transfer under s.94 IHTA.

Andrew Goodman
Osborne Clarke LLP

If Company A, as the legal owner, settles the shares of Company B, I recall that IHT will be payable on the full value of the shares, as a company has no personal allowances.

Unless the articles of Company A permit it to deal with its assets in this manner, though, any attempt to gift the shares into a settlement will likely be ultra vires.

Mindful of the use of offshore companies to hold UK assets to keep them out of the UK IHT net, I cannot see that Mr X would have any title to the shares of company B to settle them. Yes, he could be the nominal settlor, but would not the economic settlor be company A?

The most straightforward way I can see of settling the shares in company B may be for company A to distribute them to Mr X so as to enable him to settle them. Whether by dividend or demerger, this could have other unwished for tax consequences.

Paul Saunders

I believe Co A can settle the shares of Co B as andrew.goodman states, but that the settlor, indirectly, would be Mr X., but keep in mind Paul Saunders’ caveat re Articles

HMRC explanations on this state…

In general- trusts set up by companies (e.g pension trusts and employee benefit trusts) tend to be commercial and devoid of bounty (TSEM4110). However, this is not always the case and it is not unknown for companies to be party to the setting up of trusts that are non-commercial and involve an element of bounty. In some such cases the trust may be part of a tax avoidance scheme.

The settlements legislation may however apply to arrangements involving companies - for example where the property settled into a trust is provided by a company but the funds have been provided indirectly by the shareholder/director of that company making that individual a settlor under the extended definition at section ITTOIA/S620(3)

ITTOIA/S620(3) states…
A person is, in particular, treated as having made a settlement if the person—
(a)has provided funds directly or indirectly for the purpose of the settlement,
(b)has undertaken to provide funds directly or indirectly for the purpose of the settlement, or
(c ) has made a reciprocal arrangement with another person for the other person to make or enter into the settlement.

It appears X would be gifting co B shares and liable for all tax consequences. May be complicated if X retains an interest in Co B shares, eg a right to dividends etc.

Andre Davidson

I could be wrong but I can’t help but feel that there could also be some risk of immediate or deferred income tax liabilities here as well. Either under the disguised remuneration rules or some form of imputed distribution by Co A to Mr X.

For example, if you added a further step - that after a year the trust distributed the Co B shares to Mr X or his children - they have received an asset of Co A without suffering income tax on a dividend. It may not be an issue if the trust beneficiaries are unconnected.

Andrew Goodman
Osborne Clarke LLP