SVM108270 | Inheritance Tax: Close Companies - Transfers of Value by Close Companies sections 94 - 97 IHTA 1984

When a close company makes a transfer of value, tax is charged as if each individual participator had made a transfer of the amount apportioned to them by reference to their rights and interests in the company immediately before the transfer. A main requirement is, of course, that as a result of the disposition made by the company the company's estate after the disposition is less than it was before:

Example A

A company transfers a house to a director for no consideration or a consideration less than the market value

Example B

A company has an issued share capital of 100 £1 Ordinary Shares, 50 of them owned by X and 50 by Y. The company makes a gift of £500,000 to trustees for the benefit of X's and Y's children. Each of the two participators, X and Y is treated as having made a transfer of value of £250,000

If its conditions are met, section 10 IHTA 1984 can apply to company dispositions as it does to those by an individual. Companies sometimes make bad bargains and with hindsight a company can often be seen not to have received a benefit commensurate with its outlay. In view of section 10 IHTA 1984, a bad bargain would not be treated as a transfer of value provided it was a normal commercial transaction not intended to confer a gratuitous benefit.

In most cases involving close companies, payment or the asset transferred is liable to Income Tax or Corporation Tax in the hands of the recipient. Where this is the case, section 94 (2)(a) IHTA 1984 should be considered.

Transfers treated as made by section 94 IHTA 1984 are not Potentially Exempt Transfers (PETs), section 3A(6) IHTA 1984. The annual exemption is available as is spouse/civil partner exemption to the extent that the estate of the spouse/civil partner of a participator is increased. The "small gifts", "normal out of income" and "in consideration of marriage" exemptions are not available since they do not apply to deemed transfers.

Additional Guidance: SVM150000