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Where Taxpayers and Advisers Meet
Gifting shares – Don’t Make a ‘Reservation’!
30/06/2020, by Mark McLaughlin CTA (Fellow) ATT TEP, Tax Articles - Inheritance Tax, IHT, Trusts & Estates, Capital Taxes
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 Mark McLaughlin highlights a potential Inheritance Tax trap when owner-managed company shares are gifted between family members.

Introduction

It is common for shares in a family company to be passed down the generations. However, anti-avoidance rules dealing with ‘Gifts With Reservation’ (GWR) are a potentially nasty Inheritance Tax (IHT) trap.

Cake and eat it

The GWR provisions (FA 1986 ss 102-102C; Sch 20) are broadly designed to prevent an individual seeking to reduce their exposure to IHT by making a lifetime gift (which they hope to survive by at least seven years) whilst continuing to have the use or enjoyment of the gifted asset.

If ‘caught’ by the GWR rules, the gifted (or possibly substituted) property is generally treated as remaining part of the donor’s estate for IHT purposes.

Pass it on…

For example, shares in a family company often pass from parents to adult children where the parents are approaching retirement, and the children are stepping up from being employees to managing the company. The parents might remain involved with the company until their offspring are ready to take over.

Following the parents’ gifts of shares to the children, could HM Revenue and Customs (HMRC) argue that there is a GWR if the parents receive remuneration from the company?

As with many tax questions, the answer is ‘it depends’. 

Let’s be ‘Reasonable’!  

HMRC’s guidance indicates that if the parents received ‘reasonable’ commercial remuneration for their work in the company, and those arrangements continued unchanged after the gift of shares, there would be no GWR provided that their remuneration package was not linked to or affected by the gift.

On the other hand, HMRC states: ‘If, however, as part of the overall transaction, including the gift, new remunerative arrangements are made you will need to examine all the facts to determine whether the new package amounts to a reservation ‘by contract or otherwise’’ (see HMRC’s Inheritance Tax manual at IHTM14337).

Shares into Trust

Alternatively, instead of transferring shares directly to the children, the parent may transfer family company shares into trust in which the children (but not themselves) are beneficiaries. The gift into trust will normally be an immediately chargeable transfer for IHT purposes, so an IHT liability may arise unless (for example) the gift is subject to ‘business property relief’ at 100% or is covered by the parent’s ‘nil rate band’.

The parents (in this example) may wish to be trustees of the trust, so that they can exercise a degree of control over the shares in trust. Happily, HMRC’s published view is that the parents' also being trustees is not, of itself, regarded as a GWR. This applies even if the parents are entitled to payment for their service as trustees, provided any payments are not excessive. However, the parents as trustees must exercise the votes attaching to the shares in the interests of the beneficiaries (i.e. the children), and not themselves (IHTM14394).

Be Careful!

The parents could also continue to receive remuneration from the company for their services as directors. However, if gifts of shares form part of arrangements involving new or adjusted remuneration packages, the GWR rules will need to be considered carefully.          

 

The above article was first published in Tax Insider (www.taxinsider.co.uk).

About The Author

Mark McLaughlin is a Fellow of the Chartered Institute of Taxation, a Fellow of the Association of Taxation Technicians, and a member of the Society of Trust and Estate Practitioners. From January 1998 until December 2018, Mark was a consultant in his own tax practice, Mark McLaughlin Associates, which provided tax consultancy and support services to professional firms throughout the UK.

Mark  is a consultant with The TACS Partnership LLP (www.tacs.co.uk). He is also editor and a co-author of HMRC Investigations Handbook (Bloomsbury Professional).

He is a member of the Chartered Institute of Taxation’s Capital Gains Tax & Investment Income and Succession Taxes Sub-Committees.

Mark is Chief Contributor to McLaughlin’s Tax Case Review, a monthly journal published by Tax Insider.

Mark is the Editor of the Core Tax Annuals (Bloomsbury Professional), and is a co-author of the ‘Inheritance Tax’ Annuals (Bloomsbury Professional).

Mark is Editor and a co-author of ‘Tax Planning’ (Bloomsbury Professional).

He is a co-author of ‘Ray & McLaughlin’s Practical IHT Planning’ (Bloomsbury Professional) 

Mark is a Consultant Editor with Bloomsbury Professional, and co-author of ‘Incorporating and Disincorporating a Business’. This content is available as part of a number of Bloomsbury Professional's online modules.

He is Editor and co-author of ‘HMRC Investigations Handbook‘ (Bloomsbury Professional).

Mark has also written numerous articles for professional publications, including ‘Taxation’, ‘Tax Adviser’, ‘Tolley’s Practical Tax Newsletter’ and ‘Tax Journal’, which provides free information and resources on UK taxes to taxpayers and professionals, and TaxationWeb’s sister site TaxBookShop.

Mark is a Director of Tax Insider, and Editor of Tax Insider, Property Tax Insider and Business Tax Insider, which are monthly publications aimed at providing tax tips and tax saving ideas for taxpayers and professional advisers. He is also Editor of Tax Insider Professional, a monthly publication for professional practitioners.

Mark is also a tax lecturer, and has featured in online tax lectures for Tolley Seminars Online.

Mark co-founded TaxationWeb (www.taxationweb.co.uk) in 2002.

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