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!