CG36000 - Gifts in settlement: Gifts to employee trusts
Persons qualifying: individuals
Persons qualifying: close companies
Persons qualifying: other companies
Close companies: effect on shareholders
Introduction
TCGA92/S239
TCGA92/S239 provides relief from Capital Gains Tax if an individual or close company transfers an asset to certain employee trusts that qualify for favourable Inheritance Tax treatment.
The gain is either reduced or calculated on a no gain/no loss basis. Section 239 applies automatically where the conditions are met. It is not a relief that has to be claimed. It therefore applies in priority to gifts hold-over relief because it affects the basic computation.
The relief applies both to outright gifts and to transfers at below market value. The normal Capital Gains Tax rules apply to disposals in which the trustees give consideration which is greater than the costs allowable to the transferor under TCGA92/S38.
Persons qualifying: individuals
IHTA84/S28, TCGA92/S239 (1)(b)
An individual qualifies if he or she disposes of assets to trustees in such circumstances that the disposal is an exempt transfer for the purposes of Inheritance Tax under IHTA84/S28. The basic conditions of section 28 are set out below but you must consult with HMRC - Inheritance Tax if you have any concerns about the application of that section. Do not dispute whether or not section 28 applies unless advised to do so by that office.
The basic conditions of section 28 IHTA are:
- The assets must be shares and securities beneficially owned by the transferor in a company.
- The trustees, at the date of the transfer, or within one year, must
- hold more than half the ordinary shares of the company, and
- have majority voting powers on all questions affecting the company as a whole, and
- not be subject to dispossession of the shares or voting powers without their consent.
(This is subject to a special exception in Section 28(3) IHTA. Where there are shares of a class with voting powers limited to resolutions to wind up the company and/or matters affecting the particular class of share the trustees need not have majority voting powers on the particular question.)
- The transfer must be to the trustees of a trust within Section 86 IHTA which is for the benefit of a class which includes most of the employees of the company, (and possibly their relatives and dependants also).
- Certain participators of the company must be excluded from benefit under the trust.
Persons qualifying: close companies
IHTA84/S13, TCGA92/S239 (1)(a)
A close company qualifies if the transfer falls within IHTA84/S13 and is therefore not a transfer of value for Inheritance Tax purposes. Any asset can qualify, unlike the position for individuals where the relief is restricted to gifts of shares and securities. However, the same restrictions as in CG36000 apply, except that the trust can as an alternative be for the benefit of most of the employees of the company and of a subsidiary or subsidiaries taken as a single class.
The definition of close company is in TCGA92/S288. TCGA92/S239(8) expands that for the purposes of section 239 to include any company that would be close if it were resident in the UK.
As with transfers by individuals you must consult HMRC – IHT if you have any concerns about the application of IHTA84/S13.
Persons qualifying: other companies
TCGA92/S239 (4)
Companies which are not close are outside the scope of Inheritance Tax. Relief is due to such a company if
- There is a disposal by the company of assets other than under a bargain at arms length.
- The disposal is to trustees of a trust within Section 86 IHTA for the benefit of the employees of the company (and possibly their relatives and dependants).
- Certain participators of the company are excluded from benefit under the trust.
An employee trust is within IHTA84/S86 if either:
- It is for the benefit of persons of a class defined by reference to employment in a particular trade or profession, or their relatives.
- It is for the benefit of persons of a class defined by reference to employment by or office with a body carrying on a trade, profession or undertaking.
To qualify under TCGA92/S239(4) the beneficiaries of the trust must include all or most of the employees or office holders of either the company or the company and one or more of its subsidiaries. This is a similar provision to IHTA84/S13(1).
The inclusion of charities among the beneficiaries does not affect qualification.
TCGA92/S239 (5) - (6)
The trust must not permit a participator in the company, or another company which has made a qualifying transfer to that trust, or a person connected with such a participator, to benefit from the trust unless the participator:
- Would not be entitled on a winding-up of the company to 5 per cent or more of its assets.
- Is not beneficially entitled to 5 per cent or more of any class of its shares.
- Does not have rights entitling him to acquire 5 per cent or more of any class of shares.
Participator includes anyone who has been one in the past ten years.
In practice many employee trusts specifically exclude such persons from benefits. The wording of TCGA92/S239(5)-(6) is similar to that of IHTA84/S13(2)-(4) and IHTA84/S28(4)-(6).
Because TCGA92/S239(4) – (6) and the IHTA provisions are so similar you must consult with HMRC – IHT if you have any concerns about the application of TCGA92/S239(4) – (6).
Computation of gains
TCGA92/S239 (2)
TCGA92/S239(2) disapplies the market value rule in TCGA92/S17.
If the assets are transferred for no consideration or for a consideration that is less than the costs allowable to the transferor under TCGA92/S38 the asset is treated as passing for such an amount that there is no gain and no loss. If the disposal is by a company that is within the charge to Corporation Tax the price may be increased by indexation. See TCGA92/S56 (2) and CG17400+.
If the consideration paid by the trustees is greater than the costs allowable to the transferor under TCGA92/S38 the effect of disapplying TCGA92/S17 is that the chargeable gain is computed by reference to the actual consideration given.
Close companies: effect on shareholders
TCGA92/S239 (3), TCGA92/S125
See CG57125 for the effect of TCGA92/S239(3) on the apportionment under TCGA92/S125 of if there is a gift or transfer at undervalue by a close company to an employee trust.
Liaison with HMRC - IHT
If you require any advice on the application of the Inheritance Tax provisions you should contact WMBC Assets (IHT).
WMBC Assets (IHT) will need to know:
- details of the assets transferred
- details of the date of transfer
- details of the cost of each asset
- the name of the trust fund
- the names and addresses of the trustees
- any HMRC – IHT reference.
If the transferor is a company, the report should indicate whether it is a close company.
In the case of an individual or close company WMBC Assets (IHT) will notify you whether the transfer was within IHTA84/S13 or IHTA84/S28. If it was, then you should accept that the conditions of TCGA92/S239 are satisfied.
In the case of a non-close company they will advise you whether the transfer would have qualified if the company had been close.