Writing for Taxation magazine’s Readers’ Forum, BKL private client tax specialist Terry Jordan answers a query on the inheritance tax (IHT) factors when amending the articles/shareholdings of a family investment company.
The tax query
‘A client has an existing investment company holding property and listed investments, which is largely funded by a directors’ loan from the shareholders but does have some unrealised gains. The company has standard articles and husband and wife own the shares. Minds have now turned to IHT planning and involving the next generation in owning shares in the company.
What tax aspects should we consider in deciding whether to amend the articles/shareholdings of the existing company, or to get the assets out and start again with a bespoke family investment company.
I have in mind that altering the rights attaching to close company shares is considered a chargeable lifetime transfer (CLT) for IHT. I also thought that we could raise debt in the existing company to finance repayment of the existing DLA which could then be used to fund the new FIC. I’d be grateful for readers’ thoughts.’ Query 20,489 – Dublin Dion.
Terry Jordan’s reply: Shareholders could transfer shares to a discretionary trust.
‘In Dublin Dion’s circumstances, there is no prospect of obtaining BPR for IHT purposes in view of IHTA 1984, s 105(3). The spouses’ holdings would be aggregated for valuation purposes as related property under s 161.
The query refers to altering the company’s articles but does not give any detail about what is contemplated. A charge can arise under s 98 as explained in HMRC’s IHT manual at IHTM14855: ‘An alteration made to a close company’s unquoted share or loan capital, or any rights attaching to its unquoted shares or debentures, is treated as a disposition made by the participators (IHTM14851), whether or not it would normally be treated as such for inheritance tax purposes – IHTA 1984, s 98. This commonly arises where new classes of shares are created which are issued to existing shareholders in different proportions to how the existing shares are held.’
Dublin Dion mentions raising debt in the existing company (presumably from a commercial lender) and repaying the directors’ loan accounts. On the face of it, this would not have any tax consequences. The new family investment company (FIC) funded by loans would presumably have different share classes which would be distributed around the family. The lenders could gradually be repaid as the assets of the FIC grew in value.
A more straightforward approach might be for the existing shareholders to transfer shares to a discretionary trust for the benefit of younger generations keeping the loss to their estates within their IHT nil rate bands (NRB) and claim CGT holdover relief under TCGA 1992, s 260. Under current rules, they could repeat the process every seven years when they regained their IHT NRB.’
The full article was published in Taxation magazine (issue 4978) and is available to subscribers here on the Taxation website.
Our private client tax team can provide expert advice on IHT, FICs, trusts and tax-efficient estate planning. We advise individuals, trustees and families.
Our property & construction team can guide you through the complexities of property taxes including IHT, CGT and SDLT.
Our company secretarial & governance specialists can help to accurately draft, amend and file articles of association and other statutory documents.
Contact us today for a chat about how we can help you.