Ten year charge and s 99 (2) IHTA84

Just wanted to sense check my thoughts on a ten year charge calculation I am doing for a new client.

The only asset of the Trust is a 7% holding in a close company which holds rental properties. The client has provided a current MV of the shares. However, when I look at the accounts I can see the net assets of the company was higher around 4 years ago after which some properties were sold and regular distributions were made to the individual shareholders wiping out the capital proceeds and most of the cash balances.

As far as I can see under s99 (2) IHTA84 7% of these distributions are transfers of value for the Trust subject to exit charges. So whilst no tax would have been payable at the time as the rate would have been 0% I need to bring these in now to reduce the nil rate band. s 99 (3) IHTA84 suggests that I ignore any split between income/capital when looking at these transfers.

The accountant who dealt with the transfers told the client that this would not affect the Trusts but I’m struggling to see why I wouldn’t now bring these into account?

Also - just out of interest. If the shares had been distributed to the beneficiaries prior to the ten year charges and the trust wound up then my understanding is that the value of these shares would be that as at the date distributed and these s99 exits would not be brought into that computation so the exit charge would have been nil?

Do these “regular distributions” not fall within s94(2)(a) e.g. distributions liable to income tax? If not what were they and why were they not subject to income tax?

Jack Harper

You are absolutely right Jack. Thank you. I made the mistake of being influenced by HMRC’s example in IHTM16247 - Close companies and settled property: example - HMRC internal manual - GOV.UK

In that example the company transfers £1m cash to shareholders A and B absolutely and this gives rise to a transfer of value for the Trust which is shareholder C. However, this example clearly assumes (although is completely silent) that the company could make a transfer to the other shareholders absolutely without giving rise to any tax liability on them.

So now I’m wondering in what circumstances did HMRC envisage where a company could do this tax-free transfer but that is a question for a different forum!