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Is there a tax liability if a company gifts

If a company gives someone £250,000 as a gift, is there a tax liability for either party

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Hi all, I understand that if a person gives a friend £250,000 as a gift, there is no tax liability providing they survive 7 years. However, if the friend draws the money out of his company to his friend, then I guess that a different set of rules will apply ?

Any advice would be gratefully recieved as either how to do it tax free, or for the lowest amount of tax.

Many thanks

Mike

Replies (51)

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By johngroganjga
20th Sep 2019 15:06

If the transaction is as you put it, the tax will arise on the donor’s extraction of the funds from his company, but not on the subsequent gift.

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Replying to johngroganjga:
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By Tax Dragon
20th Sep 2019 15:16

Played with the straight bat of innocence.

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By Justin Bryant
20th Sep 2019 15:26

As stated here before (unless it's documented as a company loan to s/h and an onward gift of the borrowed cash from s/h to friend) that is bound to be an income taxable distribution (on the shareholder).

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By Mhunt2072
20th Sep 2019 15:33

Just to add a bit more info.

He has had the company for about 45 years and is now heading to retirement. He is looking to sell it in about 5 years, but wanst to avoid captial gains tax as much as possible ( and take less risk with with the recipient being hit with Inheritant tax)

He will be giving money to his 2 children as well as his life long friend. ( He is not married).

The recipient has no connection to the company whatsoever.

With him getting on in years, the sooner he gifts, the better ( to hopefully avoid IHT) so just looking for the cheapest tax route.

Thank you for your replies thus far.

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Replying to Mhunt2072:
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By Tax Dragon
20th Sep 2019 15:36

Trading company?

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By Mhunt2072
20th Sep 2019 17:27

Yes

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Replying to Mhunt2072:
RLI
By lionofludesch
20th Sep 2019 16:56

Mhunt2072 wrote:

Just to add a bit more info.

He has had the company for about 45 years and is now heading to retirement. He is looking to sell it in about 5 years ......

Sounds like paying CGT might be his best plan, despite his desire to avoid it.

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By paul.benny
20th Sep 2019 15:52

I don't disagree with other answers.

But suppose my company - not me - gives £250,000 to Tax Dragon on a whim, Clearly, the gift wouldn't be deductible for CT, but why would a tax charge arise on any of the parties?

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Replying to paul.benny:
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By Pygmy
20th Sep 2019 16:04

paul.benny wrote:

But suppose my company - not me - gives

Wasn't there an argument about this on AccountingWeb last week?

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Replying to paul.benny:
Psycho
By Wilson Philips
20th Sep 2019 16:57

In parting with £250k, what has happened to the value of the company, and thus the value of your estate? More accurately, have a look at section 94 of IHTA 1984.

Remember that a company is not, as a matter of fact, able to make a gift 'on a whim'. Someone - usually its directors, sometimes its shareholders, needs to tell it to do so.

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Replying to Wilson Philips:
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By Mhunt2072
20th Sep 2019 17:29

He is the sole owner of the company, no shareholders, no directors.

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Replying to Mhunt2072:
Psycho
By Wilson Philips
20th Sep 2019 18:19

A company with no directors and no shareholders? Kindly explain

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Replying to Wilson Philips:
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By paul.benny
20th Sep 2019 19:49

OK. I get that there's an inheritance tax risk. If the company is sold some years before death, it will be difficult to join the dots and recognise that this payment diminished the value of the company.

IHT aside, this seems genuinely a to be gift (ie nothing received in return) that the sole director/shareholder has instructed his company to make to an unconnected party. It's clearly a very niche circumstance for a company to make such a gift.

Very much acknowledging that I'm not a tax specialist, I don't see why or how this creates a tax liability on company, director or recipient. I'm happy to learn from anyone with more knowledge than me.

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Replying to paul.benny:
Psycho
By Wilson Philips
20th Sep 2019 20:18

Did you bother to read section 94? One doesn’t need to wait until death. The transfer by the company (if not otherwise taxed on the individual as income etc) may immediately be chargeable to IHT - companies cannot make PETs.

Although I understand that lifetime allowance should be available so it is possible that there would be no immediate charge.

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Replying to Wilson Philips:
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By paul.benny
21st Sep 2019 07:08

Wilson Philips wrote:
Did you bother to read section 94?

..er no. Although I have now.
Rarely having to deal professionally with close companies, I forget that there are special provisions for them.
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RLI
By lionofludesch
20th Sep 2019 16:47

Has he made any other gifts ?

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Replying to lionofludesch:
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By Mhunt2072
20th Sep 2019 17:29

No

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By Tax Dragon
20th Sep 2019 17:14

Knowing whether it's a trading company would be invaluable to an advisor.

I'd assumed it was your company but if so you talk about yourself in the third person. Nothing wrong with that, per se, but it can reduce clarity of information. Information is important to an advisor.

Taking advice before moving £250,000 around (given that there are obviously tax consequences to doing that) would be... well, not taking advice would be stupid. I recommend the company and its owner (whether or not that's you) appoint an advisor.

Aweb cannot act as his/your advisor.

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Replying to Tax Dragon:
RLI
By lionofludesch
20th Sep 2019 17:30

Agree - there are a lot of factors to be taken into account.

We've flagged up plenty of possible problems already. Professional advice is the logical route.

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Replying to Tax Dragon:
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By Mhunt2072
20th Sep 2019 17:30

I realise Aweb cannot be his advisor, i am just looking for feedback, opinions etc.

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Replying to Mhunt2072:
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By Tax Dragon
20th Sep 2019 17:43

Feedback and opinions are only useful if they are relevant/correct/accurate.

Providing relevant feedback and forming correct and accurate opinions requires correct and accurate information.

This is obvious.

I would not be advising (or providing feedback and forming opinions, if you prefer) without a helluva lot more than you have told us.

That said, if the fella takes out a dividend of £250,000 (probably grossed up for the tax) and hands that (the net) over to his dear friend, you can probably work out the tax yourself.

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By Matrix
20th Sep 2019 19:55

Does his friend need the cash? Why not gift some shares?

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By bernard michael
21st Sep 2019 10:10

Have you calculated the CGT if he sells the company with the £250k in it and claims Entrepreneurs Relief compared with your scenario involving s455 etc

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By SteLacca
23rd Sep 2019 09:21

Personally, I'd be looking at CA2006 S.172 and testing how the gift met that before I looked at the tax consequences.

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By Tim Vane
23rd Sep 2019 09:35

A company with no shareholders is presumably one limited by guarantee. A company with no directors is in breach of the companies Act. I am assuming this is a wind up as the facts keep changing.

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Replying to Tim Vane:
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By Tax Dragon
23rd Sep 2019 09:41

There's the sweep shot I was hoping someone would play.

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Replying to Tax Dragon:
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By matttaxnpayroll
23rd Sep 2019 10:27

I'd assume he meant to say no OTHER directors or shareholders, than the one wanting to make the gift.

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Replying to matttaxnpayroll:
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By Tax Dragon
23rd Sep 2019 10:47

I doubt he knows.

My straight bat/sweep shot comments should be read together, though they were days apart. I always thought the question was a windup (and that's the bit of Tim's comment I was responding to).

Even so, Justin's answer interests me, as (if it means what I think it says) I was unaware of that finding.

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By Justin Bryant
23rd Sep 2019 11:08

TD & WP are really turning this (once great) Q&A forum into a complete joke. The very simple answer was given by me above. s94 will not apply as it's well below the £325k threshold and/or due to the carve-out for income taxable payments in s94(2) and their combined dumb responses has cause this overly lengthy thread.

More interestingly, s94(1) and s99(3) IHTA 1984 are incorrectly drafted.

These should say “...as a result of the company’s transfer” and not “....but for the company’s transfer”.

This error is more or less spelt out by HMRC in the link below:

http://www.hmrc.gov.uk/manuals/ihtmanual/ihtm16247.htm

Or it could instead correctly read:

“...estate is less than it would be but for the company’s transfer”

Who said tax was dull!

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14851

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Replying to Justin Bryant:
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By Tax Dragon
23rd Sep 2019 11:19

Justin Bryant wrote:

TD... Q&A... joke... their combined dumb responses has cause this overly lengthy thread.

Joking back is one response to a joke thread.

What's the case law behind your initial very simple answer? (Which, for clarity, I read as saying that a payment to a non-shareholder was treated as a distribution to the shareholder.)

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Replying to Tax Dragon:
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By Tax Dragon
23rd Sep 2019 12:11

There's Peter Rowe (http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j7998/TC0...), though those circs were very different.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
23rd Sep 2019 14:15

You’re obviously in possession of facts not available to the rest of us - or perhaps you are just assuming that no CLTs have been made previously.

How do you know that my response was dumb if you’re ignoring them? Either ignore them or read to the end - I was quite clear that there would be a charge only if the nil rate band wasn’t available to cover it. As well as making it clear that section 94 would not apply if the transfer were taxed as income. So if my response was dumb that makes yours even more so.

And your inability to read the legislation properly (section 94(1) for instance makes perfect sense as it is written) goes a long way in explaining your propensity for referring to irrelevant case law and/or misinterpreting that case law.

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Replying to Wilson Philips:
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By Tax Dragon
23rd Sep 2019 14:37

Wilson Philips wrote:

As well as making it clear that section 94 would not apply if the transfer were taxed as income.

I'm going to disagree with both you and Justin on that point because of the words "that person's" in s94(2)(a).

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Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd Sep 2019 15:06

You've lost me. The wording simply says that if a payment etc forms part of the participator's profits for income tax or corporation tax then it is left out of account for the apportionment provisions.

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Replying to Wilson Philips:
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By Tax Dragon
23rd Sep 2019 15:12

And the reason that you're talking about s94 is that the payment in question would not be to the participator. It is the person what gets the money that is "that person" in (2)(a).

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Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd Sep 2019 15:24

My bad - I've no idea why I referred to 'participator'. But I still don't follow your point - if the advance etc is taxed as income in the hands of the recipient where does your disagreement lie?

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Replying to Wilson Philips:
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By Tax Dragon
23rd Sep 2019 15:38

With you - only over your previous lack of clarity.

Justin was quite clear though (unusually for him) in his initial reply - the tax charge, he says, is on the shareholder, not on the person receiving the pay-out. If he's right, s94(2)(a) does not apply.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd Sep 2019 15:48

Are we talking about the same tax here? By the "tax charge" I read that to mean the section 94 charge - which is indeed on the shareholder. But, although I'm struggling to understand a scenario where this might actually apply in practice, if a close company transfers an asset to a non-shareholder and that non-shareholder is assessed to income tax on the transfer then 94(2)(a) should indeed apply.

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Replying to Wilson Philips:
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By Tax Dragon
23rd Sep 2019 16:04

OMG... will you and Justin please settle your differences and start reading each other's posts?! What Justin said (on 20th Sep 2019, at 15:26) is:

Justin Bryant wrote:

As stated here before (unless it's documented as a company loan to s/h and an onward gift of the borrowed cash from s/h to friend) that is bound to be an income taxable distribution (on the shareholder).

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Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd Sep 2019 16:18

Well, I disagree with Justin that it would necessarily be an income taxable distribution. I agree with you, though, that if the payment etc is in fact assessed to income tax on the participator then this does not prevent 94(1) applying - without the safety net of 94(2)(a).

Situations where 94(2)(a) might apply? Close company pays £20,000 for annual audit. That is a transfer of value. Without the benefit of 94(2)(a) an apportionable transfer of value?

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Replying to Wilson Philips:
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By Tax Dragon
23rd Sep 2019 16:24

Wandering way off topic... but no, that's covered by s10.

Thank you for responding to my question re Justin's "simple" answer. No-one else had, and I was starting to think it was 'obvious' (and, therefore, 'just me').

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Replying to Tax Dragon:
Psycho
By Wilson Philips
23rd Sep 2019 17:21

Agreed.

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Replying to Wilson Philips:
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By Tax Dragon
27th Sep 2019 17:22

Wilson Philips wrote:

Well, I disagree with Justin that it would necessarily be an income taxable distribution.

I hate to say it, but... do you feel the same having read CTM15350?

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Replying to Tax Dragon:
Psycho
By Wilson Philips
27th Sep 2019 19:04

Yes. It might well be a distribution, depending on the circumstances. However, depending on the circumstances, it might not be.

I think though that we are still in agreement that even if it were the tax charge would fall on the shareholder and not on the recipient, such that the income tax carve out would not apply, contrary to Justin’s (and, initially, my) view.

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By Tax Dragon
27th Sep 2019 19:21

But stick "almost" ahead of "bound" in The Great One's initial response and he's almost bound to be right, in the (fictional) case in question, or so it now seems to me. (Not on the carve out point, agreed.)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
27th Sep 2019 19:30

Agreed - just as removing “necessarily” from my comment is almost bound to make it wrong.

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By [email protected]
23rd Sep 2019 10:44

People are assuming that it is a ltd company. but this may not be the case. Non accountants often use the term "My company" for a "trading as" scenario where in fact they are a sole trader. The distiction is useful as it gets the trader in the mindset of "company money" vs "my money". Of course when it comes to SA you have to look at both

To the OP: What is the legal form of this entity? As you've probably gathered, the tax implications differ somewhat!
Absolutely you need to get a tax professional on to the case £250k is a significant sum
I'd say it's worth getting a financial advisor on the case too as there is clearly some retirement planning to be done and wider implications than just the £250k already mentioned

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By [email protected]
23rd Sep 2019 11:21

Can I suggest that the contributors take another look at the post. It is from a Mr Hunt …. er with the first name Mike.

try saying that as fast as some of you have responded to a question posted by someone who is in all probability not a practising accountant

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Replying to [email protected]:
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By Tax Dragon
23rd Sep 2019 11:27

There're loads of them on companies house. I've acted for a subset of same. The joke isn't funny for very long, unless perhaps you're Bart Simpson.

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Replying to Tax Dragon:
By SteLacca
23rd Sep 2019 13:35

Wasn't that Amanda Hugnkiss?

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