Close companies

By Tolley

The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Close companies
  • What is a close company?
  • Transfers made by a close company
  • Alteration of share capital

Generally speaking, inheritance tax (IHT) is charged only on individuals and trusts. However, to prevent avoidance of the tax, the charge is extended to close companies in the following cases:

  • transfers of value made by the close company
  • where the share capital or loan capital of the company is altered

Consequently, where a settlor is a shareholder in a close company, you may need to consider the rules below to ascertain whether he has made a transfer that is subject to IHT.

The rules will also require consideration where the settlor is a participator because he:

  • possesses voting rights in the company
  • possesses a right to receive distributions from the company
  • is entitled to ensure that income or assets of the company will be applied for his benefit

IHTA 1984, s 102(1)

What is a close company?

A close company is defined, as it is for corporation tax, as a company under the control of five or fewer participators or of any of its directors. This includes, for the purposes of IHT, companies resident outside the UK.

For a general discussion on close companies, see the Definition of a close company guidance note in the OMB module (subscription sensitive).

Transfers made by a close company
When a charge to IHT arises

A charge to IHT may arise where a close company makes a gift (or other transfer of value)

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