Share this content

Gifting cash from close company(ltd) to individual

Didn't find your answer?

Hi,

I would like to gift around £200k in cash to my sister, but the cash currently sits in my limited company and so I am trying to think of the most tax efficient way to do this, so would welcome any input contributors on here may have. I apologise for the length of the post but an awful lot of posters on here seem to get pilloried for a lack of detail in their enquiries, so I wanted to avoid that. For background, I did qualify as a CA with ICAS many years ago but I never worked in tax and I haven't worked in practise for about 15 years. I am aware that as is often the case, a little knowledge can be worst than none at all! I do also have an accountant for my limited company and self assessment who I will discuss this with in due course, however, I generally like to do some research prior to discussing any issues like this with my accountant so that we can have an informed discussion at the time.

So as I mentioned, the cash currently sits in my limited company, it is the result of accumulated profits which the company will pay corporation tax on. I am the sole shareholder and director of the company (so it is a "close" company) and it is a non-trading (investment) company. My sister was briefly a director and shareholder of this limited company in the past but she is no longer a director or a shareholder. I am therefore not 100% clear if she is a connected party to the limited company. The gift really is just a gift, she is not entitled to it, it is not delayed payment for anything and I am not expecting to receive any repayment or monetary value from her in the future as a result of this gift. I just know she has good use for the money and I would like to find a way to transfer it to her in the most tax efficient way possible.

The simplest option (option 1) it seems is for me to distribute the money to myself as dividends, and then gift the money to her from me personally. I would then pay dividend distribution tax but the gift to my sister would be a Potentially Exempt Transfer (PET) that would incur no Inheritance Tax (IHT) as long as I do not die within 7 years. I do not particularly like this option as I will pay dividend distribution tax at a combination of the Higher and Additional rates (c.£50k at Higher and c.£150k at Additional rate so combined tax rate of c.36.7%) and I already use my dividend allowance each year so it does not seem very tax efficient. If I were not gifting this cash to my sister would not otherwise be distributing it from the company at this timeas I do not personally need the cash and there are investments that the company could make with it. I am not worried about the 7 year time limit, I am under 50 and in good health.

A second option is for the limited company to gift the cash directly to my sister. My understanding then is that this would be a Chargeable Lifetime Transfer (CLT) under IHT at 20% which the limited company would be liable for. Is that correct? I would only become personally liable if the limited company failed to pay this charge, or was late in paying it. I could offset this £200k against my personal IHT tax free threshold but ideally I don't really want to as I would like my kids to have the benefit of this one day rather than my sister. This seems better than option 2 as the charge is limited to 20% vs 36.7%, but am I missing something? I am assuming the cash gift nor the IHT CLT charge are tax deductible by the limited company, is that correct?

A third option I have considered is for the limited company to initially loan the cash to my sister directly, and then in the future (several years if necessary) the limited company releases her from the debt obligation ie cancels her obligation to repay the loan. I admit, this is where it starts to get a bit complicated. This would be a non-trading loan relationship as my limited company is not a bank, insurer or financial trader. Upon relief of the loan to my sister by the limited company would my sister then incur an income tax charge on the cancelled amount of the loan, and would the limited company be able to claim relief against non-payment of the cancelled loan? Or is it any combination of the above e.g. my sister has to pay income tax on the cancelled loan and the limited company cannot claim relief against it?

The fourth option is that my limited company (co.1) loans the £200k directly to my sister's limited company (co.2) (of which she is the only shareholder and director) since I know that she will use the money to invest into her business anyway. co.1 can then release co.2 of its debt obligation at some point in the future. I do not know if co.1 and co.2 would be considered connected parties by virtue of them each being owned by me and my sister. I assume co.2 would incur a Corporation Tax (CT) charge upon relief of the debt, I do not know whether co.1 would receive any relief from cancelling the loan. Thinking longterm, one downside of this route for my sister seems to be that after cancellation of the loan the full £200k would be chargeable as and when she attempts to withdraw it from, or sell, co.2. Whereas if the money was gifted to her directly and she contributed it to co.2 as a shareholder loan, then she could withdraw this £200k from co.2 as a shareholder loan repayment in the future without any charge.

Option 5 - starting to think outside the box(!) - I could transfer £200k's worth of shares in my company into my sister's personal name for nil value. This would create Capital Gains Tax (CGT) charge for me on the the market value of the shares transferred (£200k). My limited company can then buy back those shares from my sister for £200k on which it would incur 0.5% stamp duty. This would result in a total tax rate of 20.5% (compared to 20% under option 2) but I would be able to benefit from my CGT allowance if I have any available.

Finally, worth consideration, am I in breach of any of my obligations as a director of a limited company with any / all of these options?

Interested to hear any thoughts if you have got this far!

Thanks.

 

Replies (49)

Please login or register to join the discussion.

RLI
By lionofludesch
13th Jun 2021 18:04

Good luck with this.

Thanks (0)
avatar
By Tax Dragon
13th Jun 2021 18:10

I tend to agree with Lion.

It's nice that you want to make the gift and it's good that you're thinking about the tax. But best of all, you already have an accountant. S/he's paid to think about all the issues you've raised (and more that you haven't... for example, does the expression 'anti-avoidance' mean anything to you?)

Part of the issue is the options you set out end in different financial outcomes (another phrase you might know... "apples and pears"). But surely you know where you (and/or your sister) want the money to end up. So can't you take some of the options off the table before you begin?

Thanks (0)
Replying to Tax Dragon:
RLI
By lionofludesch
13th Jun 2021 18:15

The phrase "pre-ordained steps" came immediately to mind.

Thanks (0)
Replying to Tax Dragon:
avatar
By The Dullard
13th Jun 2021 18:23

I disagree with you. I think that all of the options have the same fiscal and financial consequences. With option 1 those consequences are clear, the others simply obfuscate those consequences.

The OP's taking a lettuce leaf to a knife fight IMHO.

Thanks (0)
Replying to The Dullard:
avatar
By Tax Dragon
13th Jun 2021 18:29

More live sport I missed?

You may be right - I didn't read to the end of at least option 4.

Thanks (0)
RLI
By lionofludesch
13th Jun 2021 18:26

This might help to eliminate a few options for you.

https://www.taxinsider.co.uk/gifts-to-and-from-a-company-don-t-forget-ih...

Thanks (0)
.
By Cheshire
13th Jun 2021 18:35

As a CA I would have thought you would (a) appreciate getting proper, targeted paid for advice from a trusted professional rather than a bunch of folk you know nothing about on internet; that (b) asking a bunch of folk you don't know in an effort to do 'research' is not research at all; (c) using the companies cash as if it were your own is not appropriate; (d) - (z) I'm bored now as my head was buzzing with questions after the first couple of paragraphs.

Although to be fair you can find some answers to all these scenarios as the questions come up a lot, albeit one at a time. Not saying all the responses were correct though. As TD, amongst others often reminds posters.

Thanks (4)
avatar
By Mr_awol
14th Jun 2021 09:03

Wind your company up via an insolvency practitioner, take the cheap CGT rate, and give the money away.

Of course that might not work for you for a number of reasons - reasons your accountant will know, since they are aware of your personal circumstances. It's one of the reasons why it's often better NOT to go into the meeting with your advisor having got a load of half-baked ideas off the internet. The accountant will probably spend longer giving you reasons WHY you cant do stuff that s completely irrelevant to you than they would have spent advising you in the first place.

Anyway im off to take my car for a service. I'm going to save a fortune because I've spent all weekend googling what the knock from my front suspension could be, so before the mechanic takes a look at the car I'm going to tell him how i want him to fix it.

Thanks (1)
Replying to Mr_awol:
avatar
By Mr_awol
14th Jun 2021 10:30

Or, if the money is going to your sister's company, buy shares in that company via your own company.

(Again, may be completely bonkers, due to a variety of endless possibilities, but that's the benefit of going straight to your own advisor with this - unless you dont trust them not to miss one or more of the possible options, in which case maybe that tells its own tale).

Thanks (0)
avatar
By Justin Bryant
14th Jun 2021 09:21

The gift from company "benefits" you, as you then avoid having to gift from your own funds; hence it's a taxable distribution (like a dividend) on you and not tax deductible in the company. If below £325k IHT theshold there's no 20% IHT. Alternatively, it's a PAYEable benefit for you and potentially CT deductible (in which case no IHT regardless).

It odd how articles like that above totally fail to consider IT & CT issues of company gifts (which are usually a more important/relevant).

In fact, can anyone find anything online re that point apart from my posts here?

Thanks (1)
Replying to Justin Bryant:
avatar
By Tax Dragon
14th Jun 2021 09:27

The way I see it is that the company is doing something for personal reasons. Not its own personal reasons (companies tend not to have those) - rather the personal reasons of the shareholder (hence "like a dividend" treatment) or, possibly, those of the director (hence PAYE etc).

Logically, if it's taxable "like a dividend", say, then that treatment ought to flow through to IHT (i.e. PET not CLT). Dulls suggests it does (

The Dullard wrote:

I think that all of the options have the same fiscal ...consequences.

)

You seem to hint that it doesn't.

Thanks (0)
Replying to Tax Dragon:
avatar
By Justin Bryant
14th Jun 2021 10:33

No. Only if CT deductible would it be within s12 IHTA 1984 exemption. If it's ITable on s/h as a distribution that's neither here nor there.

Thanks (0)
Replying to Justin Bryant:
avatar
By Tax Dragon
14th Jun 2021 12:04

You must be right (because otherwise s94 et al seem fairly redundant) but it seems odd that the same thing can be taxed on the same individual both as income and as a CLT. (And you could avoid the IHT by just taking the dividend yourself and making the gift yourself. Presumably avoiding IHT like that isn't seen as abusive.)

Tax is officially weird.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
14th Jun 2021 12:14

The answer might lie in the fact that I don't believe that it would be the same person subject to IT and IHT.

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
14th Jun 2021 12:30

I have to say that makes sense - and, if that generalia specialibus non derogant thingy is relevant here, it seems most logical that the taxing provisions that deal directly with the situation (being the ones you have picked out, alongside s94ff as I mention) are the ones that apply. Indeed, they would seem (to me) wholly or partly redundant if not.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
14th Jun 2021 12:35

Actually, it doesn't really matter whether it is the same person or not. In this case either the OP or (in my view the more likely) his sister is likely to be assessed on a (deemed) distribution. In either case s94(2)(a) would seem to avoid the 'double tax'.

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
14th Jun 2021 12:41

Boom! I've had it in my head for ages that there was an IHT rule that said something like that but had given up looking! (It's been a niggle not a necessity.) Oh the irony that the very section I cited was the one wherein it was to be found!

Thank you Wilson.

Thanks (1)
Replying to Justin Bryant:
Psycho
By Wilson Philips
14th Jun 2021 09:49

I'm not convinced that the deemed dividend will be taxed on the OP, and don't think that one needs to consider whether the OP "benefits" from the company making the payment. Seems to me that this is an advance of funds to an associate of a participator, and therefore squarely within CTA 2010 s455 and ITTOIA 2005 s415.

Thanks (0)
Replying to Wilson Philips:
avatar
By Justin Bryant
14th Jun 2021 10:28

Yes; that too, but step-sisters would be caught per my comments.

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
14th Jun 2021 10:43

"too"? Surely it's one or the other. And I don't recall the OP referring to a step-sister.

Thanks (0)
Replying to Wilson Philips:
avatar
By The Dullard
14th Jun 2021 11:12

No. It's a de facto distribution of the company's assets, as a matter of company law, and HMRC definitely want to tax it as such. See CTM15310 and the 2nd paragraph of CTM15350.

Thanks (2)
Replying to The Dullard:
RLI
By lionofludesch
14th Jun 2021 13:29

The Dullard wrote:

No. It's a de facto distribution of the company's assets, as a matter of company law, and HMRC definitely want to tax it as such. See CTM15310 and the 2nd paragraph of CTM15350.

Of course it is.

Thanks (0)
Replying to lionofludesch:
Psycho
By Wilson Philips
14th Jun 2021 14:24

Company transfers £200k to shareholder's bank account, in absence of anything indicating that it is a dividend. Assuming that this is not in settlement of any outstanding liability, which provisions of CTA 2010 would you say come into play?

(Assuming that there are no pointers to tax it as earnings.)

I concede that it may come down to what documentation, if any, there is.

Thanks (0)
Replying to Wilson Philips:
avatar
By The Dullard
14th Jun 2021 14:59

Perhaps it's a gift?

Wilson Philips wrote:
I concede that it may come down to what documentation, if any, there is.

Or isn't.

Thanks (0)
Replying to The Dullard:
Psycho
By Wilson Philips
14th Jun 2021 15:20

Agreed. But if the company is making the payment, and making the bold assumption in this case that the OP is relatively clued up about how to run a company (recording decisions of directors etc) one would imagine that there is some paperwork to support the transaction. Even if it is only a board minute confirming that the directors have decided that the company should make a gift to ...

In the case of a payment to a shareholder, it doesn't really make any difference - even if the 'gift' were to fall within s455, s458 would apply on the 'immediate release' so shareholder is taxed on a dividend. I accept that if the intention is entirely gratuitous, that may well take it outside of s455 and into s1000. I guess that if it were more efficient to have the dividend taxed on the sister instead this could easily be done.

Thanks (0)
Replying to Wilson Philips:
avatar
By The Dullard
14th Jun 2021 15:32

I agree that it MIGHT make it more efficient to have the dividend taxed on the sister. We know nothing about her particular circumstances. Perhaps she's got a menagerie of children and is claiming tax credits.

Wilson Philips wrote:
... and making the bold assumption in this case that the OP is relatively clued up about how to run a company...

That's a very bold assumption in all the circumstances.

And what if the gift is made from the brother's company straight to the sister's company? I accept that that would be stupid, but it seemed to be the OP's preference - I reiterate my point about the boldness of your assumption - that's when s 1000 would most certainly be HMRC's preference. In my view a loan with an "immediate release" is a sham though.

Thanks (0)
Replying to The Dullard:
Psycho
By Wilson Philips
14th Jun 2021 15:45

The Dullard wrote:
In my view a loan with an "immediate release" is a sham though.

I wouldn't dispute that - a loan with an "immediate release" isn't really a loan, is it? But s455 is not limited to loans, is it? Problem is that most of us know what a loan is - "advance" is a bit more nebulous.

Per my example above, if a client company paid £200k into the bank account of a shareholder, I don't have much doubt that most members here would treat that as an advance to the shareholder, the first question to be asked almost certainly being "do you intend to (or did you) repay this within 9 months of the period end?"

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
14th Jun 2021 15:44

Wilson Philips wrote:

most of us know what a loan is

cough cough Rangers cough cough

Thanks (2)
Replying to Tax Dragon:
Psycho
By Wilson Philips
14th Jun 2021 15:47

Touche - a loan with an immediate release is no more a loan than one that, from the outset, is never to be repaid.

Thanks (0)
Replying to Wilson Philips:
avatar
By Justin Bryant
15th Jun 2021 09:27

Where's your legal authority for that proposition*? I've just seen a large M&A deal where exactly that happened (for non-tax reasons). Also that used to be a simple way to get cash into a UK sub of an offshore company.

I assume you accept now that this is within the scope of taxable distributions; otherwise tax schemers wouldn't need to come up with complicated stuff like this: https://www.gov.uk/guidance/disguised-remuneration-tax-avoidance-using-u...

*I cannot think of a single legal case where (in the absence a sham) a loan has not been respected as a loan and even (especially) in tax avoidance cases, there would almost always be no sham arrangements as tax avoidance is the spur to entering into genuine transactions.

Thanks (0)
Replying to Justin Bryant:
Psycho
By Wilson Philips
15th Jun 2021 11:22

I don't believe that I said that it would not fall within the scope of taxable distributions. My query was the identity of the party suffering the tax - if s455 et al apply it would be the sister. If s455 et al do not apply (for whatever reason) then it is the OP.

Thanks (0)
Replying to Tax Dragon:
RLI
By lionofludesch
14th Jun 2021 17:36

Tax Dragon wrote:

Wilson Philips wrote:

most of us know what a loan is

cough cough Rangers cough cough

Here's some advice, Drags. Get one of those PCR tests done. For your own peace of mind.

Thanks (0)
Replying to Wilson Philips:
avatar
By The Dullard
14th Jun 2021 17:24

If £200K left the companies bank account and ended up in a shareholder's bank account and there was no documentation, the first question to ask is whether or not it will be coming back. If the answer is no, I'd say that it was a distribution, as a matter of fact.

Thanks (0)
avatar
By bernard michael
14th Jun 2021 09:30

I vote with AWOL
However in 4 the Op states that the sister wants to use the money to invest in her own company.
Is that for survival or a business opportunity ??
In the preamble the OP also states that the company has accumulated profits "on which he will pay tax " inferring that the profits are from the current year and not b/f reserves. Is this correct ??

Thanks (2)
avatar
By nrw
14th Jun 2021 09:40

Ignoring most of this, but picking up on one point: if, as it appears, the cash is destined for your sister's limited company rather than your sister personally, then is it simpler to fund via a loan from your company to her company - kicking the extraction of company cash into personal hands (and associated tax) down the road?

Thanks (1)
By Duggimon
14th Jun 2021 09:59

Why not just loan it to her company and then not do anything else?

Thanks (1)
RLI
By lionofludesch
14th Jun 2021 10:16

Companies are great for saving tax.

Until you want to draw out the money.

Thanks (0)
avatar
By justsotax
14th Jun 2021 10:26

......research is about reading (ok maybe also watching if there is content on the web for the subject) - but it isn't about asking.....that's what your accountant is for....you really should now that.

Thanks (1)
avatar
By Tax Dragon
14th Jun 2021 11:17

@Matt_123, Duggimon may have answered from north of the border. You'll have to forgive him if your opening sentence doesn't make sense up there.

Matt_123 wrote:

Hi,

I would like to gift around £200k in cash to my sister.

Thanks (1)
Replying to Tax Dragon:
avatar
By Hugo Fair
14th Jun 2021 11:50

Careful, I'm no longer sure what personal sensitivities are held by the mods ... but there's a danger, after they've finished washing down the Mars bars with Irn Bru, that you'll find a few cabers being tossed at cavalier and not so tim'rous beasties flying by on scudding clouds.

Thanks (2)
Replying to Tax Dragon:
By Duggimon
14th Jun 2021 12:55

I resent your implication, why only just this weekend I gifted my own beloved sister a bottle of sunscreen, for she is self isolating in her garden and unable to go to the shops (I threw it over the fence).

I did read all the way to the end of the OP to where he said it was for investing in the sister's company, I really don't know why he'd be looking at paying masses of tax to do so when it could all be avoided in one swell foop, though as ever I have enjoyed the discussion around the finer points of the relevant tax laws from yourself and others.

Thanks (1)
Replying to Duggimon:
avatar
By Tax Dragon
14th Jun 2021 15:05

This time next year brother's company goes down the toilet. Your way, it takes sister's company with it. OP's way she's fine (and in due course can buy a replacement bottle of sunscreen).

It's apples and pears. I saw someone making a barely-considered (but nevertheless insightful) comment about that above.

Thanks (1)
Replying to Tax Dragon:
avatar
By Mr_awol
14th Jun 2021 13:17

Tax Dragon wrote:

@Matt_123, Duggimon may have answered from north of the border. You'll have to forgive him if your opening sentence doesn't make sense up there.

Matt_123 wrote:

Hi,

I would like to gift around £200k in cash to my sister.

That's a good point. Another reason for the OP to ask their (local) accountant - who may be aware of geographical nuances.

Certain parts of the UK, for example, may be more likely than others to be able to take advantage of spousal exemption.............
.
.
.
.
.
(I was going to suggest which parts might be more likely to benefit from this specialised tax planning but suspect that would result in toy-throwing, and not from those who would technically have the right to be 'offended' either)

Thanks (1)
Replying to Tax Dragon:
Maytuna
By DJKL
14th Jun 2021 13:25

I am hoping our innate ability means we gift nothing on Friday (or this afternoon)

Thanks (0)
avatar
By Tax Dragon
14th Jun 2021 16:08

Matt_123 wrote:

I generally like to do some research prior to discussing any issues like this with my accountant so that we can have an informed discussion at the time.

Now you have thoroughly researched the issues, you can have a great discussion with your accountant.

Thanks (0)
avatar
By fawltybasil2575
14th Jun 2021 18:13

@ Matt_123 (OP).

In intending no criticism, since I understand your rationale for inviting views on hopefully answering your question, there are many other facts which I consider should be ascertained before one can begin to answer your question.

IMHO, one would need information re your spouse/partner/children/other siblings; your other assets (ie apart from your company); information re your sister’s spouse/partner/children; the reason for the £200K payment (eg to assist in expanding the sister’s company, or to bale it out from potential insolvency) etc.

I would also recommend your consulting not only your accountant, but also your solicitor, for their views.

As regards your asking:-

"am I in breach of any of my obligations as a director of a limited company with any / all of these options?",

I would opine that most of the options could be "in breach of" your fiduciary duties as a director, ie if it could be established that the proposed payment (howsoever it is treated in its Accounts) impacted adversely on its financial position.

One matter not apparently queried by AWEB members thus far is whether there is a material credit balance on the Director’s Loan Account in your company (self-evidently, if there is say £150K therein, then the range of possible answers to your question would probably change dramatically !).

Basil.

Thanks (0)
avatar
By Matt_123
15th Jun 2021 09:54

Hi all,
Thanks for the discussions and responses that addressed some of the issues my original post raised, I appreciate it was a long post and it is impossible to consider all the implications. There are some good points there, some of which I had considered and some I had not, so I found it interesting. Hopefully some part of this post is also useful to others in the future.

Thanks also to the trolls, you lot crack me up!

Thanks (0)
Replying to Matt_123:
avatar
By Tax Dragon
15th Jun 2021 12:07

Matt_123 wrote:

I appreciate it was a long post and it is impossible to consider all the implications.

But at least the main implication - whether the income tax charge is on you or your sister - got a good airing.

Thanks (0)
Ivor Windybottom
By Ivor Windybottom
15th Jun 2021 13:08

You're not from Norfolk* are you?

Have you met my wife and my sister?
... ah, here she is!

* substitute local area as appropriate.

Thanks (0)
Share this content