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IHT exit charge scenarios

IHT exit charge scenarios


A trust owns all of the share capital of a limited company worth say £10 million

The company issues shares to acquire the business of another company.  The trust thereafter owns 66% of a group worth say £15 million.

Is there an exit charge under s65(1b) IHTA 1984 owing to the value of the shareholding after the transaction needing to be discounted for the loss of overall control?

Second scenario.  The trustees of a trust comprising discretionary property grant its beneficiaries interests in possession.

Is there an exit charge under s65(1b) IHTA 1984 owing to the capitalised value of trust assets being reduced on account of the trustees lack of income stream?

EDITED from s65(2) to s65(1b) at 9-16am 1st March - sorry for the error: DoG

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By AB_85
29th Feb 2016 20:11

No and no.

An exit charge would arise when assets which were subject to the relevant property regime cease to be relevant property. This isn't the case here. Any diminution in value of the shares is irrelevant for these purposes.

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29th Feb 2016 21:27

I wish I could agree

My reading of s65(2) is that it applies without the property ceasing to be relevant property.  The charge is on a "loss to the trust" basis.

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By AB_85
29th Feb 2016 21:46

Hi,

I think s65(2) simply sets out the mechanics by which the charge to tax would be calculated in the event of an exit charge.

The issue of whether a charge arises in the first place is dealt with in s65(1) which states

"(1)There shall be a charge to tax under this section—

(a)where the property comprised in a settlement or any part of that property ceases to be relevant property (whether because it ceases to be comprised in the settlement or otherwise); and

 

(b)in a case in which paragraph (a) above does not apply, where the trustees of the settlement make a disposition as a result of which the value of relevant property comprised in the settlement is less than it would be but for the disposition."

 

 

 

 

(a) does not apply here - no property comprises within a settlement has ceased to be relevant property.

(b) is also not in point in my opinion. It refers to where "the trustees of the settlement make a disposition." In your scenario 1 the trustees have not made any disposition. The company has simply issued new shares to acquire a business. In your scenario 2 the trustees have made an appointment within the settlement, but I do not agree with the premise that there has been any diminution in value. I would have thought the valuation basis is that of an arms length transaction between willing buyer and willing seller. I do not think the shares are worth less simply because the trustees exercise their right to give a beneficiary an absolute interest in income.

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01st Mar 2016 09:15

Sorry, it was s65(1)b that I had meant to refer to.  My thoughts were that "In a case in which paragraph (a) above does not apply" covered situations where the property does not cease to become relevant property.

Turning to the meaning of "disposition", HMRC cover this at IHTM04023 and point out that under s98 IHTA 1984, an alteration of share or loan capital is included.

So I think that in my first example, it is really a question of whether HMRC would consider there to be an obvious loss.

In my second example, I tend to think there is not a charge under s65.

I suppose that s10 might be of some assistance.

 

 

 

 

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01st Mar 2016 10:57

In case (a) if there has been a disposition, then the trustees would be in breach of duty (they would surely have been supportive of the acquisition as 100% shareholder). I agree with the other respondent though that there is no disposition, and they have made an appraisal that they are getting, rather than giving, value.

In case (b) I also agree with the other respondent; there is no disposition the trust property is worth what it was before; the beneficiaries simply have an automatic entitlement to the income from it, rather than relying on the trustees' discretion.

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01st Mar 2016 19:29

Thanks both

for your contributions.

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02nd Mar 2016 11:16

Was vendor a beneficiary? Where is acquiring company resident?

If  vendor is beneficiary or possible beneficiary of the trust, then valuation issues become much more significant . Possible "adjustor clause" to protect against HMRC challenge?

 

Offshore questions:- Is the acquiring company UK resident? If not and the acquired company pays a dividend to its new parent company, the question of "transfer of assets abroad" arises if the vendor is or could be a beneficiary of the trust-even if full value was paid. Such dividends would then be assessable on the vendor under ITA s720 even though receivable by its parent company, not the trust.

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02nd Mar 2016 11:22

UK

A UK resident company

The vendor company is run, but not controlled, by the primary beneficiaries of the trust.  However, together with parents, they do have control.

Parents are the trustees holding 100% of acquiring co.

 

 

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02nd Mar 2016 14:22

If vendors are beneficiaries

which you say they are, then valuation becomes far more important. If sale is at an undervalue, that makes the beneficiary/shareholders co- settlors, with all the consequences which flow from that. If sale is at an overvalue, that is a current benefit to the shareholder/beneficiaries.

You have to get the price right ! Have a look at SP5/92 [non-resident trusts].Don't be mislead by the preamble to SP5/92, the valuation guidelines will apply to transactions with all trusts .

Consider some of the consideration being in Loan notes, for example, to enable a workable adjustor clause under para's 12-15 to be put in place.

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02nd Mar 2016 18:44

Thanks Montrose, very helpful.

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