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Inheritance Tax Planning

A recent case highlighted potential risks in connection with a transfer of a shareholding in a private limited company into a settlement, followed relatively soon after by a sale of the shares by the trustees.

It is a relatively common, as part of pre-sale planning, for an owner of a private incorporated business to consider a prior settlement of the shares on trust for the settlor&#39s family (excluding the settlor and settlor&#39s spouse from all benefit). Provided, of course, that access to the proceeds of the shares settled in not needed such a settlement, prior to sale by the trustees, may well produce a desirable tax saving.

In most cases, if the shareholder sells his shares direct (to the extent that retirement relief and the annual exemption from capital gains tax do not cover the gain), the gain is likely to be taxed at 40%. On the other hand the maximum CGT rate payable by the trustees will be 34%. Of course the tax implications of settling the shares have to be considered in the first place. In most cases the shares will qualify for business property relief for inheritance tax purposes, and therefore, regardless of the type of trust that the shares are transferred to, the value of the transfer for IHT purposes would be nil. Of course in the event of the shares not qualifying for business property relief the transfer to the settlement will be a transfer of value which maybe substantial. If the settlement is discretionary, a transfer of value will be a chargeable one, resulting in potentially 20% lifetime IHT charge on any amount exceeding the available nil rate band. The availability of business property relief in such planning is therefore essential.

For CGT purposes hold-over relief will be claimed so that any CGT liability is postponed until the actual sale of the shares.

Inland Revenue Special Commissioners recently considered an appeal from the Revenue determination that a transfer of shares to a settlement, relatively shortly before the sale of the shares to a third party was a chargeable transfer for inheritance tax purposes and business property relief did not apply. The case was Reynaud and Others -v- IRC (10th May 1999). The facts of the case were as follows:-

All the shares in C Ltd were owned by four brothers. On 27th April 1995 each of them made a discretionary settlement for the benefit of his family and charity but excluding himself and his spouse and transferred all of his shareholding in C Ltd to the trustees of the settlement. On the following day C Ltd purchased some of the shares from the trustees of the four settlements with the aid of a bank loan. On the same day, following further negotiations, the remainder of the shares in C Ltd were sold by the trustees of the four settlements to M Ltd. Two important considerations were that when the discretionary settlements had been made there had been a real possibility that the sale to M Ltd would not proceed, however since C Ltd had not had sufficient funds to buy the shares form the trustees, if the sale of the remaining shares in C Ltd to M Ltd had not taken place, C Ltd would not have purchased the shares from the trustees. The Inland Revenue argued that the transfer of the shares to the discretionary settlement and C Ltd&#39s purchase of the shares were associated operations within the meaning of section 268 IHTA 1984. If the two were associated operations, the disposition was treated as taking place at the time of the latest operation, ie. the C Ltd&#39s purchase of the shares by which time the shares had been sold to C Ltd by the trustees for cash in respect of which business relief was not available. Alternatively the Revenue considered that the principle of fiscal nullity or Ramsay principle (see W T Ramsay Ltd -v- IRC 1981) apply to treat the transaction as a gift of cash to the settlement. The taxpayers appealed contending that the transfer of value was the gift of shares to the discretionary trust which was complete at that stage and that purchase of the shares by C Ltd was not a relevant associated operation.

It would seem that the Special Commissioners paid particular attention to the fact that when the settlement had been made, it could not have been said that there was no reasonable likelihood that the sale to M Ltd would not take place. Completion of the sale had taken place after a day of negotiations and there must have been a reasonable likelihood that the negotiations could have failed. In the event and based on facts of the case the Special Commissioners found that the two transactions were not part of the single composite transaction, and that neither the principle of fiscal nullity applied in the case and so allowed the taxpayers&#39 appeals. It remains to be seen whether the Revenue will appeal from this decision.


Although so far the decision has gone in favour of the taxpayers, the case empahsises the importance of planning ahead of any planned or contemplated sale of shares as far in advance as possible. Where the transactions take place on consecutive days, there is at least a chance of an Inland Revenue challenge.


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