Trusts and Inheritance Tax

Close companies

Produced by Tolley
  • 23 Mar 2022 10:53

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

  • Close companies
  • What is a close company?
  • Transfers made by a close company
  • When a charge to IHT arises
  • The amount of the transfer
  • Tax treatment of the apportioned amount
  • Apportionment to trustees
  • Alteration of share capital
  • Compliance matters

Close companies

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

  1. a close company makes a transfer of value, or

  2. the share capital or loan capital of a close company is altered, resulting in a loss in value to one or more participators

What is a close company?

A close company is defined, as it is for corporation tax, as a company under the control or ownership of five or fewer participators or of any number of directors who are participators. This includes, for the purposes of IHT, companies resident outside the UK. A participator is a person who in relation to a company has a share or interest in the income or capital of the company.

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

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) that results in a fall in the value of the property owned by it (ie comparable to a fall in the value of an individual’s estate). In such a case, the shareholders (or other participators) in the company are treated as having made the gift (or transfer) with the value apportioned between them.

The transfer is a chargeable lifetime transfer. It is not a

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